RBI Feels Rupee May Be Undervalued Now

Why It Matters

An RBI signal of undervaluation can attract foreign capital and support export competitiveness, while the limited‑intervention pledge reduces uncertainty for traders and investors.

Key Takeaways

• RBI says rupee likely undervalued after recent depreciation.
• No specific exchange-rate target; intervention only for volatility.
• Balance of payments remains stable despite higher crude prices.
• Real effective exchange rate also points to rupee undervaluation.
• Rupee nearing psychological 100-per-dollar barrier, but RBI stays hands‑off.

Pulse Analysis

The Reserve Bank of India’s latest commentary underscores a shift from defensive rhetoric to a more nuanced view of the rupee’s positioning. By stating the currency may be undervalued in both nominal and real effective terms, Governor Sanjay Malhotra signals that the current depreciation could enhance export margins and attract portfolio inflows. At the same time, the RBI’s explicit refusal to chase a target rate reinforces its commitment to a market‑driven exchange mechanism, intervening only when volatility threatens financial stability.

For investors and corporates, the governor’s reassurance about the balance of payments eases concerns that rising crude‑oil costs from the West Asia conflict could strain external financing. A stable BoP, combined with a potentially undervalued rupee, improves the outlook for foreign‑direct investment and reduces the cost of servicing external debt. Market participants are likely to monitor the RBI’s tolerance band closely, as any deviation into heightened volatility could trigger limited, targeted interventions.

Looking ahead, the rupee’s approach to the 100‑per‑dollar threshold remains a psychological flashpoint. While the RBI maintains a hands‑off stance, sustained undervaluation could prompt policymakers to consider structural measures—such as easing capital controls or adjusting macro‑prudential tools—to harness the competitive advantage without igniting inflationary pressures. Analysts will watch real‑effective‑exchange‑rate trends and trade data to gauge whether the currency’s trajectory aligns with broader growth objectives.