The Indian rupee has once again approached its record low against the US dollar, trading around 96.84 on Wednesday. This decline places it just 12 paise shy of its previous all-time low of 96.96 per dollar, recorded in May 2026.
Despite the currency's recent dip, Reserve Bank of India (RBI) Governor Sanjay Malhotra made a notable statement, suggesting that the rupee might, in fact, be undervalued. Speaking after the RBI's latest monetary policy decision, Malhotra cited various valuation metrics, including the Real Effective Exchange Rate (REER), as indicators that the rupee is not overvalued.
RBI's Stance on Currency Valuation
Governor Malhotra emphasized that financial markets can exhibit irrational behavior in the short term, but tend to gravitate towards the correct value over a longer horizon. He affirmed that the central bank's strategy is to allow the rupee to discover its "correct value" through market forces, while simultaneously ensuring an orderly movement and preventing excessive volatility in its exchange rate.
Context: Rate Hike and External Pressures
The rupee's latest decline followed the RBI's decision to raise its policy repo rate by 25 basis points to 5.50%. This marks the first rate increase by the central bank in nearly four years. The currency has faced persistent pressure throughout the year, exacerbated by the escalation of the West Asia conflict in late February, which led to a surge in crude oil prices.
As a major importer of crude oil, India's demand for US dollars typically increases with rising oil prices, placing additional downward pressure on the domestic currency.
Measures to Stabilize the Rupee
In the past, the RBI has implemented various measures to alleviate pressure on the rupee. These include introducing a concessional swap facility for diaspora deposits and bond issuances. Such initiatives have enabled banks to mobilize substantial foreign currency deposits, totaling nearly $133 billion through FCNR(B) deposits, providing temporary relief to the currency.
Analyst Perspectives on Policy Shift
Analysts believe that the RBI's recent rate hike and its shift in policy stance to "calibrated tightening" could offer some support to the rupee by improving interest-rate differentials. Sumit Singhania, Head of Research at Bajaj Broking, commented that the 25 basis point hike to 5.50% is justifiable, and the policy shift is more significant than the rate itself, as it rules out near-term rate cuts.
Radhika Rao, Senior Economist and Executive Director at DBS Bank, echoed this sentiment, describing the policy shift as "modestly constructive" for the rupee. She noted that wider rate differentials and a tightening bias could bolster the currency's resilience against external shocks, though a strong US dollar continues to pose a challenge.
The RBI's overarching approach appears to be focused not on defending a specific rupee-dollar exchange level, but rather on facilitating the currency's adjustment towards its intrinsic value in a controlled and orderly manner.