Reserve Bank of India Governor Sanjay Malhotra told Mint that the Indian rupee may now be undervalued after its recent depreciation. The statement marks a significant shift from the central bank's usual reluctance to comment on currency levels, and signals a potential policy change that could ripple through markets. For years, the RBI avoided directional remarks on the exchange rate, preferring to act quietly in the foreign exchange market. By publicly stating that the rupee is undervalued, Malhotra has opened the door to a more active strategy to correct the imbalance, with far-reaching implications for importers, exporters, investors, and monetary policy.

The Big Picture

The rupee has been under pressure for months, hitting record lows against the dollar as global capital flows shifted and India's trade deficit widened. The RBI has spent billions from its reserves to smooth volatility, but the currency has still lost about 8% over the past year. Malhotra's comment suggests the central bank now sees the depreciation as excessive — a view that could lead to a more active approach to strengthening the rupee. The macroeconomic backdrop is challenging: consumer price inflation remains above 5%, well above the RBI's 4% target, and a weak rupee makes imports — especially oil, which accounts for about 25% of total imports — more expensive. At the same time, the trade deficit has widened to over $25 billion in the latest quarter, pressuring the balance of payments and foreign exchange reserves.

“"The rupee may be undervalued at this point," Malhotra said, opening the door for a potential policy pivot.”

The governor did not specify the degree of undervaluation, but analysts estimate the deviation could be between 5% and 10% based on purchasing power parity models. If the RBI acts to correct this distortion, it could reduce its dollar purchases or even sell reserves to strengthen the currency. This would be a radical departure from the policy of recent years, where the central bank accumulated reserves to prevent excessive appreciation that would hurt exporters. Now, the balance of risks seems to have shifted: imported inflation and the need to attract foreign capital weigh more heavily than export competitiveness.

By the Numbers

• Depreciation: The rupee has weakened roughly 8% against the dollar over the past 12 months, touching all-time lows below 87 rupees per dollar.
• Reserve intervention: The RBI has sold over $30 billion from its foreign exchange reserves in the last six months to defend the rupee, with limited lasting effect. Reserves currently stand at around $620 billion.
• Trade deficit: India's trade gap widened to over $25 billion in the latest quarter, driven by high oil and gold imports, which together account for nearly 40% of total imports.
• Inflation: Consumer price inflation remains above 5%, well above the RBI's medium-term target of 4% with a +/-2% band. Core inflation, excluding food and energy, is around 4.5%.
• Capital flows: Foreign investors have pulled over $10 billion from Indian bonds and equities in the last three months, adding downward pressure on the rupee.

Why It Matters

Malhotra's remark is not a casual observation. It signals a potential shift in the RBI's framework: from merely managing volatility to actively correcting a perceived misalignment. If the central bank follows through, it could reduce its dollar buying or even sell dollars to push the rupee higher. Key implications:

For importers: A stronger rupee would lower the cost of imports of crude oil, electronics, and machinery, easing margins and inflationary pressures. Companies like airlines (which pay for fuel in dollars) and refineries would be the biggest beneficiaries.

For exporters: Sectors such as textiles, IT services, and pharmaceuticals would lose competitiveness if the rupee appreciates. Companies with dollar revenues and rupee costs would see margins compressed. For example, IT firms, which generate over 70% of revenue in dollars, could see earnings fall by 3-5% for every 5% appreciation.

For foreign investors: A stronger rupee boosts dollar-denominated returns on Indian bonds and equities. If the RBI manages to stabilize or appreciate the currency, it could attract portfolio inflows, especially in a global environment where yields in developed markets remain low. However, if the appreciation is abrupt and not backed by fundamentals, it could trigger volatility and erode confidence.

For monetary policy: A stronger rupee helps contain imported inflation, giving the RBI more room to maintain an accommodative stance or even cut rates. This would be positive for economic growth, which has slowed slightly in recent quarters.

What This Means For You

If you are an importer or have dollar-denominated debt, a stronger rupee is good news: your costs will fall. If you are an exporter, you should hedge your currency exposure to protect margins.

1. 1Hedge currency risk: Use forwards or options to lock in rates if you have foreign currency exposure. Given that volatility could increase in the near term, it is prudent to secure favorable exchange rates.
2. 2Review your portfolio: Indian rupee bonds and equities could benefit from appreciation; consider increasing allocation. Local fixed-income funds could offer attractive currency-adjusted returns. For equity investors, domestic consumption and financial sectors may gain, while exporters like IT and textiles could suffer.
3. 3Watch RBI actions: The central bank's next policy decision and any intervention will be key signals for the rupee's direction. Pay attention to the Monetary Policy Committee minutes and any statements from RBI officials. If the central bank starts selling dollars actively, it will be a clear sign that it seeks appreciation.

What To Watch Next

Markets will focus on the RBI's upcoming monetary policy meeting and any further comments from Governor Malhotra. Global factors — especially the Federal Reserve's interest rate path and the dollar index — will also play a major role. Data on India's trade balance and inflation over the next few weeks will provide clues on whether the rupee's undervaluation is indeed correcting. Any actual intervention by the RBI to strengthen the rupee (such as selling dollars) would confirm the shift in stance. Investors should prepare for potentially lower volatility but clearer directional moves in the currency. An additional factor is the corporate earnings season: export-oriented companies may offer cautious guidance if the rupee appreciates, while importers could improve their outlook.

The Bottom Line

Malhotra's statement is a watershed moment for Indian currency policy. The RBI has acknowledged that the rupee may be undervalued, opening the door for a more active role in correcting the imbalance. For investors, it's time to adjust portfolios and hedges. The rupee may have further to run on the upside, but execution and global conditions will determine the pace. The governor's message is clear: the central bank will no longer tolerate a weak currency at any cost. Now, the market must decide whether this stance is credible and whether fundamentals support it.