RBI Governor Says Rupee Is Not Overvalued Despite Recent Weakness

The Indian rupee’s recent decline is being driven by global developments and should not be interpreted as a sign of domestic economic weakness, Reserve Bank of India Governor Sanjay Malhotra said. In an interview with The Hindu BusinessLine, he said the currency is “not overvalued” and could even be viewed as undervalued.

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Malhotra attributed the rupee’s movement to factors including geopolitical tensions, a stronger U.S. dollar and volatility across emerging markets. His remarks indicate that the central bank sees external conditions, rather than India’s underlying economy, as the primary reason for the currency’s performance.

Global Factors Behind The Rupee’s Movement

This comes amid times where several emerging market currencies have been under strain owing to global uncertainty and strong dollar demand.

An undervalued currency tends to be lower than the fair value which is determined by factors such as the overall inflation rate, production and trade capabilities. In practice, this means that the valuation of the rupee according to the Reserve Bank of India is that the rupee is not fairly valued based on the economy of India.

A relatively undervalued rupee can make India’s exports more competitive since their prices tend to be lower when viewed from the point of view of foreign customers. The export-driven industries, including IT and pharmaceuticals, could also benefit from the same.

Impact On Imports And Inflation

The other side of a weaker currency is higher import costs. India relies heavily on overseas purchases of crude oil, electronics, machinery and fertilizers. If the rupee faces pressure but the price of crude remains high, then the costs of imports can increase, which will affect the cost structure of businesses, and ultimately consumers.

Exchange rate fluctuations can also affect inflation, and this becomes important for monetary policy. The RBI monitors these developments while assessing risks to price stability and economic growth.

Why The Governor’s Remarks Stand Out

Public comments from serving RBI governors on whether the rupee is fairly valued are uncommon. Bloomberg described Malhotra’s assessment as a rare public statement because the central bank has traditionally refrained from characterising the currency as either overvalued or undervalued.

The Governor’s remarks therefore offer an indication of how the RBI currently views the rupee. While external developments continue to influence currency markets, the central bank’s assessment suggests it does not see the recent depreciation as a reflection of weakening domestic economic fundamentals.