Is really Rupee Undervalued? What RBI Says.

The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, stated that the Indian rupee has likely become undervalued in both nominal and real terms following its recent sharp depreciation. 

Speaking in an exclusive interview with Mint on May 25, 2026, Governor Malhotra emphasized that the recent 6% slide in the currency—driven largely by escalating geopolitical tensions in West Asia and surging crude oil prices—means the rupee is no longer overvalued.

Key Takeaways from the RBI Statement

• REER Basis Undervaluation: The RBI highlights that the Real Effective Exchange Rate (REER), which measures the trade-weighted and inflation-adjusted value of the rupee against foreign trading partners, has dropped below its long-term average, indicating a clear undervaluation.

• No Specific Target Rate: The Governor reiterated that the central bank does not target a specific price level or exchange band (such as aggressively defending the psychologically significant 100-per-dollar mark).

• Intervention Only for Volatility: The RBI intends to step into the foreign exchange market solely to curb abnormal volatility, manage smooth price discovery, and control speculative trading.

• Ample Defense Firepower: India maintains strong foreign exchange reserves of nearly $700 billion, giving the central bank significant capability to manage sudden disruptions.

• Expectation of Recovery: The RBI anticipates that once the external geopolitical shocks and global energy market volatility stabilize, the rupee is well-positioned to appreciate.

  
  

Economic Impact

An undervalued rupee typically makes Indian exports more price-competitive on the global stage. However, because India is highly dependent on imports for energy, the depreciation also risks widening the trade deficit and increasing the cost of raw materials like crude oil, electronics, and fertilizers.

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Following the central bank's statement, the Indian rupee rebounded significantly, closing 46 paise higher at 95.23 against the US dollar.

The currency experienced a powerful short-covering rally after touching a historic intraday low near 96.96 to 97.00 per dollar last week. The verbal intervention from the central bank effectively cooled off aggressive speculation and stopped the currency's slide toward the psychologically critical 100-per-dollar threshold. [1, 2, 3]

Market Reaction Summary

The spot market's behavior demonstrates renewed confidence following the central bank's policy guidance: 

• Sharp Recovery: The rupee gained a total of 173 paise from its absolute low point of 96.96 last week, leveling off to trade around the 95.20–95.45 band.

• Reversal of Losses: The currency's 0.48% single-day gain on May 25, 2026, marked its strongest session in weeks, reversing a large chunk of its recent 6% monthly slide.

• Calmed Derivatives: Open interest in near-term USD/INR forward contracts dropped, showing that speculative bets positioning for a further collapse have unwound. 

  
  

Key Drivers Behind the Rebound

Beyond the Governor's speech, a combination of tactical steps and broader market shifts drove the sudden strength:

1. Aggressive Forex Intervention: The central bank backed its words with action, dumping an estimated $1 billion daily directly into the spot market to physically squeeze dollar buyers.

2. Liquidity Boost: Market confidence was reinforced by the announcement of a massive $5 billion buy-sell swap auction designed to inject rupee liquidity and manage forward premium rates.

3. Massive Risk Cushion: The market took comfort in India’s $700 billion foreign reserves and a massive ₹1.09 lakh crore allocation to its Contingent Risk Buffer (CRB), proving the central bank has ample ammo to fight off currency runs.

What to Watch Next

Forex dealers note that while the verbal intervention was highly successful, long-term stability depends heavily on external factors.