RBI Governor Sanjay Malhotra Says Rupee May Be Undervalued as Short-Term Markets Show Irrationality — October 7, 2026

Reserve Bank of India (RBI) Governor Sanjay Malhotra noted that financial markets often display irrational behaviour over the short term and asserted that the Indian rupee may currently be undervalued relative to underlying economic fundamentals.

Speaking at the post-monetary policy press conference in Mumbai, the central bank chief addressed concerns surrounding persistent depreciation pressures, currency survey pessimism, and aggressive hedging behaviour that continue to anticipate further downside for the rupee.

Divergence Between Sentiment and Fundamentals

The Governor highlighted that currency valuations frequently experience short-run dislocations driven by sentiment rather than macro realities.

"It's only in the long run, they are able to find the right value," Malhotra stated during the interaction. "By a number of estimates, including the REER (real effective exchange rate), rupee is not overvalued, may be undervalued."

The comments came in response to questions regarding why foreign exchange polls and corporate hedging strategies continue to price in a structural depreciation bias against the greenback, even as India demonstrates robust domestic economic growth and consistent capacity to attract foreign capital inflows.

The Macroeconomic Context

The RBI's assessment relies on the Real Effective Exchange Rate (REER), a trade-weighted measure adjusted for relative inflation differentials against major trading partners. When REER metrics drop below historical averages, a currency is technically undervalued, indicating that price discovery in spot markets is being dominated by external headwinds rather than trade competitiveness.

Key drivers behind recent currency dynamics include:

• Global bond yield pressures and firm US Treasury yields creating cross-border asset reallocation away from emerging markets.
• Volatility in global energy prices and geopolitical friction that heighten import bills for major commodity importers.
• Extended foreign portfolio outflows in equity segments despite steady domestic macroeconomic performance.

Policy Implications for Indian Markets

The central bank reiterated its established stance that it does not manage or target a specific nominal exchange rate band. Instead, RBI operations in the foreign exchange and forward markets are intended to curb speculative excess, anchor volatility, and ensure orderly liquidity conditions.

For domestic equity and debt investors, the central bank chief's vocal pushback against excessive currency pessimism provides a stabilizing signal. An undervalued currency supports outbound shipments across export-intensive sectors such as information technology, pharmaceuticals, and engineering goods. At the same time, the RBI's firm monitoring eases corporate concerns over imported inflationary pressures, offering stability for interest rate trajectories and corporate margin forecasts.

Tags: Reserve Bank of India Indian Rupee Forex Market Sanjay Malhotra Real Effective Exchange Rate