"The rupee may be undervalued," the governor of India's central bank made a rare statement, hinting at readiness to intervene!

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Reserve Bank of India Governor Sanjay Malhotra has made the rare public assertion that the rupee may have been undervalued, and clearly stated that "all necessary measures" will be taken to maintain order in the foreign exchange market. This statement has been interpreted by the market as a direct signal that the Reserve Bank of India is strengthening its stance on currency market intervention.

Malhotra stated in an interview with the "Mint" newspaper on the 25th: "Given the recent depreciation, there is reason to believe the rupee is not overvalued. If anything, one could say the rupee has now become undervalued." He emphasized that the Reserve Bank of India does not target a specific exchange rate level, but will use all available tools, including approximately $700 billion in foreign reserves, to curb speculative volatility in the market. This interview was published just ahead of the central bank’s June 5 monetary policy meeting.

The rupee touched a historic low of 96.9650 earlier this week, but rebounded subsequently as the central bank intensified intervention, Iran-U.S. talks pushed down oil prices, and market expectations for rate hikes strengthened. On Monday, the rupee was at 95.29 to the dollar, with a three-day cumulative gain of 1.5%. Nevertheless, the rupee has still depreciated by about 6% so far this year.

ANZ Bank Group economist Dhiraj Nim said the governor’s public comments on the rupee’s valuation show that "the central bank is doing everything it can to stop the rupee sliding under strong balance of payments pressures," meaning that the rupee defense actions will continue for the time being.

A Rare Statement, Clear Signal of Intervention

The Reserve Bank of India usually deliberately avoids making public statements regarding the rupee’s valuation or targeting exchange rate levels, so Malhotra's wording has drawn special attention. He directly stated in the interview: "Let me emphasize—we will take all necessary measures to ensure orderly price discovery in the foreign exchange market."

According to a Bloomberg report last week, preventing the rupee from further depreciating is currently the central bank’s top priority, and it is evaluating several options, including potential rate hikes, additional currency swaps, and financing dollars for overseas investors.

Indian policymakers have recently sent similar signals multiple times. Chief Economic Adviser V. Anantha Nageswaran said last month that the rupee is "undervalued from a fundamentals perspective," and offers an "attractive entry point" for long-term investors.

The rupee’s continued depreciation this year is mainly due to sustained shocks from stock capital outflows. Data shows that foreign capital outflows from India’s stock market have now exceeded $23 billion this year, surpassing last year’s record levels. The indicator measuring the rupee’s competitiveness against other currencies fell to 90.96 in April, its lowest since 2014. A reading below 100 indicates the rupee is undervalued against a basket of currencies.

Rising Inflationary Pressure, Market Expects No Change in June

Despite earlier discussions about the possibility of a rate hike, most economists, including Nim, still expect the central bank will keep rates unchanged at the June 5 meeting.

The inflation situation is becoming increasingly complex. India’s CPI for April was still below the central bank’s 4% target, but the wholesale price inflation rate has more than doubled, rising to 8.3%. Fuel retailers have raised gasoline and diesel prices for the fourth time this month, manufacturers are expected to pass on the higher costs to consumers, and retail inflation may come under further pressure.

Malhotra said in the interview that the central bank’s forecasts for inflation and economic growth in the current fiscal year (4.6% and 6.9%, respectively) "will of course need to be revised in line with changing conditions." He also pointed out that the current balance of payments situation "is not yet a major problem," but "requires coordinated attention from the government, central bank, and all relevant institutions."

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