Summary
RBI Governor Sanjay Malhotra told The Hindu Businessline that the rupee is not overvalued and may in fact be undervalued, both in nominal terms and by the Real Effective Exchange Rate (REER). The rupee has depreciated close to 5.8% year-to-date in 2026 amid West Asia tensions, elevated crude prices and FPI outflows, even as India's own fundamentals - over 6% growth and 11 months of import cover - remain intact.
Malhotra maintains the RBI targets no specific exchange rate and intervenes only to smooth excessive volatility.
WHY IN NEWS FOR UPSC & STATE PCS
A sitting RBI Governor's public comment on whether the rupee is fairly valued is unusual, since central banks typically avoid signalling a preferred exchange rate level to prevent inviting speculative trading. Malhotra's remark, repeated in near-identical terms across an interview and a press conference within days, has been read by markets as a deliberate signal that the rupee's fall reflects global shocks rather than domestic weakness.
Standard News
The Rupee's Fall Isn't the Story
- The RBI's Choice of Words Is When a central bank governor says his own currency is "undervalued," it isn't a stray comment. It's a calculated act of communication with consequences well beyond the headline exchange rate.
From the Trading Desk to the Working Capital Loan Start with
who reacts first to a line like this: currency traders and importers, not the average household. When Malhotra told The Hindu Businessline the rupee "may be undervalued" in both nominal and REER terms, the immediate audience was speculators weighing whether to keep betting against the rupee.
For an exporter in Tiruppur running on thin dollar margins or an importer pricing next quarter's edible oil shipment, that one sentence signals how far the rupee might still fall - or whether the RBI will step in first.
Why "Undervalued" Is Safer Than It Sounds
A central bank calling its currency overvalued invites a shorting spree. Calling it undervalued does the opposite - it tells the market that further depreciation isn't justified by fundamentals, discouraging aggressive bearish bets without the RBI spending a single dollar of its reserves.
This is verbal intervention, cheaper than market intervention, but it only works if traders believe the central bank knows something they don't.
The Gap the Number Hides Here is the
tension Malhotra's remark quietly manages: India's growth and import cover argue the rupee shouldn't be this weak, yet it has still slid 5.8% in 2026 on flows that have nothing to do with Indian fundamentals. The Governor is essentially telling the market the price is wrong without saying "we will defend a specific level"
- because that would hand speculators a target to attack.
What This Means for the Exam Angle This is
less a story about the rupee's number and more about how a central bank uses calibrated ambiguity as a policy instrument - reassuring markets on direction while refusing to commit to a level. That distinction between signalling and targeting is exactly the mechanism GS3 examiners reward over a simple "rupee fell, here's why" account.
Quick Facts
Key numbers & takeaways — revise these first
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Sanjay Malhotra is the Governor of the Reserve Bank of India.
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REER measures the rupee against a basket of trading partner currencies, adjusted for inflation.
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The rupee has depreciated about 5.8% year to date in 2026.
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India's forex reserves cover roughly 11 months of imports.
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India's economy has been growing at over 6% annually.
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The RBI follows a managed float regime and does not target a fixed exchange rate.
Connect the dots for your UPSC preparation.
Standard news covers the event. Log in to read our comprehensive analysis and uncover the hidden constitutional, structural, and ethical dimensions of this topic:
The full mechanism linking Malhotra's specific phrasing to how the RBI actually intervenes in the forex market when words alone aren't enough.
What happens when markets stop believing a central bank's verbal signal and what that risk looks like in practice.
The precise trade-off between defending the rupee through reserves versus through language and which sectors absorb the cost either way.
The way-forward assessment of what would force the RBI to move from talk to direct market intervention.
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