The rupee has been under pressure against the US dollar for a while now, squeezed by high crude oil prices, geopolitical tension and money flowing out of emerging markets. Against that backdrop, RBI Governor Sanjay Malhotra has said something central bankers almost never say out loud: he thinks the rupee is undervalued.
He first said this in an interview with Business Line on Sunday, July 26, 2026, one of four journalists who spoke with him that day. His words: “I would like to reiterate that it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued both in nominal and in REER (real effective exchange rate) terms.” He also made clear that the RBI doesn’t target any fixed exchange rate or band for the currency.
This wasn’t a one-off comment either. Bloomberg’s Anup Roy had asked him something similar at the post-Monetary Policy press conference on June 5, 2026. Malhotra initially pushed back on the idea that he’d said anything like this in an earlier Mint interview, but then added: “It is reasonable to think that it [Rupee] may not be overvalued.” He continued, “Some people do say that it is undervalued in terms of REER if they look at. By some accounts, it is undervalued.”
What exactly did the Governor say
Putting it together, Malhotra’s position is that the rupee is undervalued both in plain nominal terms and by REER, the Real Effective Exchange Rate. At the same time, he’s stuck to the RBI’s usual line: no target level for the currency. The central bank steps into the forex market to smooth out excessive volatility, not to defend some fixed price for the rupee, he said.
Markets have read this as the RBI signaling that the rupee has fallen further than economic fundamentals justify. The Governor’s comments suggest the recent slide doesn’t line up with how strong the Indian economy actually is.
So what does “undervalued” actually mean
A currency counts as undervalued when it’s trading below what its market rate “should” be, going by the country’s economic fundamentals. Those fundamentals include things like growth, inflation, productivity, trade numbers, capital flows and how investors are feeling about the country generally.
Sometimes a currency drops because of a temporary shock rather than anything structural, and that gap between where it’s trading and where it “should” be is what economists call undervaluation. In the RBI’s reading, the rupee’s current level just doesn’t capture how resilient India’s macro picture really is.
Why the RBI thinks this
The RBI’s logic rests on a gap: domestic conditions look fine, but external pressures have knocked the currency around anyway. India is still growing north of 6% a year, one of the fastest rates among major economies. Inflation has cooled off from its recent peaks. Reserves are healthy enough to cover 11 months of imports, and the external account has held up reasonably well despite global turbulence.
But the rupee hasn’t been spared. Costlier crude, geopolitical flashpoints, a strong dollar and repeated bouts of foreign portfolio outflows have all worked against it. Foreign portfolio investors have pulled billions out of Indian equities. All of this has pushed up dollar demand while choking off capital coming into the country, and together it’s dragged the rupee down more than the underlying economy would suggest it should fall. The number so far: a 5.8% depreciation year to date.
Understanding REER, and why it matters here
Malhotra didn’t just point to the nominal exchange rate, he specifically called out the REER too. The nominal rate is simple: how much rupee it takes to buy a dollar, a euro, a pound, whatever. REER goes further. It weighs the rupee against a basket of India’s major trading partners’ currencies and then adjusts for inflation differences between countries.
That makes REER a better gauge of how competitive the currency actually is, because it isn’t just tracking the dollar, it’s tracking relative prices across many currencies at once. Economists lean on it precisely because a currency can look fine against the dollar while still being over or undervalued in a broader sense. By invoking REER specifically, the Governor was pointing to a wider, more comprehensive read on the rupee’s value, not just a dollar comparison.
Does the RBI actually want a stronger rupee
Not really, at least not as a fixed goal. The RBI’s stated position is that it isn’t chasing a permanently strong or permanently weak rupee. Its approach to the exchange rate is market-driven, and intervention is reserved for stopping wild swings rather than pushing the currency toward any particular level.
There’s a trade-off either way. A stronger rupee makes imports cheaper, which helps keep a lid on inflation. A weaker one helps exporters, since their foreign earnings convert into more rupees. Given that push and pull, the RBI would rather avoid sharp, disorderly moves in either direction than chase a specific target.
What this actually signals
The bigger takeaway here is about India’s fundamentals, not some hint that a policy shift is coming. When the RBI calls the rupee undervalued, it’s essentially saying the recent fall has been driven by outside forces, not any weakening in the domestic economy.
Analysts also see it as a way to anchor expectations, a signal that the central bank is watching for exchange rate moves that don’t track the fundamentals. Where the rupee goes from here will still hinge on things like oil prices, US monetary policy, global capital flows and geopolitics. But the RBI’s underlying message is that the Indian economy remains solid, and the currency’s recent weakness is more about global noise than anything happening at home.
These remarks draw a useful line between what the currency is doing day to day and what the economy is actually doing underneath. Short-term, exchange rates move with global sentiment and financial conditions. Over the medium term, they’re supposed to track the strength of the economy itself. By calling the rupee not overvalued but undervalued, the RBI is essentially arguing that the recent fall has gone further than India’s fundamentals would normally support.
Key Takeaway: RBI Governor Sanjay Malhotra’s remarks that the rupee is undervalued in both nominal and Real Effective Exchange Rate (REER) terms underline the Reserve Bank’s assessment that recent currency weakness reflects global headwinds rather than any deterioration in India’s macroeconomic fundamentals. While reiterating that the RBI does not target a fixed exchange rate and intervenes only to curb excessive volatility, the Governor highlighted the importance of indicators such as REER, foreign exchange reserves, capital flows, inflation, and growth in evaluating currency movements.
The episode illustrates how external factors, including elevated crude oil prices, geopolitical uncertainty, a strong US dollar, and foreign portfolio outflows, can influence exchange rates even as the Indian economy remains resilient, reinforcing the significance of exchange rate management and external sector stability in India’s monetary policy framework.
M.C.Q.
Question 1: Which of the following best describes the Real Effective Exchange Rate (REER)?
- A. Exchange rate of the rupee only against the US dollar.
- B. Exchange rate adjusted only for interest rate differences.
- C. Inflation-adjusted exchange rate of a country’s currency against a basket of major trading partners’ currencies.
- D. Exchange rate fixed by the Reserve Bank of India.
Question 2: According to RBI Governor Sanjay Malhotra, the Reserve Bank of India’s approach towards the exchange rate is to:
- A. Maintain a fixed exchange rate against the US dollar.
- B. Keep the rupee permanently strong.
- C. Intervene only to reduce excessive volatility without targeting any specific exchange rate.
- D. Depreciate the rupee to promote exports.
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