Explained: Why RBI Governor said that Indian rupee is undervalued and what it means
· OpIndia
In an interesting development, Sanjay Malhotra, the Reserve Bank of India (RBI) Governor, has stated that the Indian rupee is “not overvalued” and can be considered undervalued in nominal terms and Real Effective Exchange Rate (REER) terms.
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In a recent interview with The Hindu Businessline, RBI Governor Sanjay Malhotra attributed the rupee’s weakness to prevailing geopolitical tensions, the strengthening of the US dollar, and volatility in emerging markets.
Governor Malhotra’s assessment suggests that the rupee’s sharp depreciation against the US dollar is primarily driven by global factors rather than domestic economic weakness.
The RBI Governor publicly commenting on the rupee’s value at a time when the markets are volatile is a rare public statement.
Indian rupee undervalued in nominal and REER indices: What does it mean
The RBI Governor emphasised that the RBI does not target any specific exchange rate or band; its interventions are aimed only at curbing excessive volatility or speculation.
“We do not target any specific exchange rate or band for the rupee. Our intervention, whenever necessary, is targeted to curb excessive volatility,” Governor Malhotra said.
“The Indian [currency] rupee is “not overvalued” and could even be considered undervalued in both nominal and real effective exchange rate terms,” he added.
A currency is considered undervalued when its market exchange rate is weaker than the levels indicated by economic fundamentals, including relative inflation rates, productivity growth, trade performance, and various other indicators of purchasing power or competitiveness.
In a nutshell, the rupee buys fewer foreign goods or requires more units to purchase a dollar than its underlying strength would imply.
On the contrary, when a currency is overvalued, it is stronger than the country’s economic fundamentals justify, making exports less competitive.
Since bilateral rates, take rupee versus US dollar for example, can be misleading given they ignore trade with other partners and inflation differences. For this reason, the RBI relies primarily on effective exchange rates, NEER and REER.
The Nominal Effective Rate or NEER is a trade-weighted average of the value of the rupee against a basket of around 40 currencies of key trading partners, covering 88% of India’s trade, while weights are based on trade shares, with the base year typically 2015-16. NEET captures pure nominal movements without inflation adjustment.
Under REER interpretation, if the rupee is above 100, it is relatively stronger or overvalued, meaning that Indian goods are more expensive compared to partners.
If the rupee hovers below 100, it is relatively undervalued. Major deviations below long-term averages indicate potential undervaluation beyond what economic fundamentals warrant.
The Real Effective Exchange Rate (REER), on the contrary, involves adjustment of relative inflation between India and its trading partners.
REER’s formula is expressed as REER=NEER*(domestic price index/foreign price index). It better reflects real competitiveness and purchasing power.
Simply put, a REER above 100 indicates an overvalued currency, and a REER below 100 indicates an undervalued currency.
From overvalued to undervalued rupee: Tracing the shift
For a period, the rupee was overvalued; however, it has since pivoted into the undervalued territory following sharp depreciation.
In around November 2024, Averaged INR/USD was around 84.4, with NEER 91.68 and REER 108.03, making the rupee overvalued by over 8% relative to the base (100). REER remained above 100 until July 2025.
A shift, however, was seen by April-May 2026. REER slumped to multi-year lows, recorded at around 90.96 in April and 89.08 in May. Meanwhile, NEER was at a record low of around 77.19 in May. The average INR/USD stood at 95.5 in May 2026.
June 2026, however, witnessed a partial recovery; REER was recorded at 91.26 and NEER at 78.21, still indicating an around 8-9% real undervaluation.
Other indices and gauges also indicate a similar trend, with the Indian rupee becoming more competitive even relative to the Chinese Yuan in some specific comparisons.
An interesting thing happened: the rupee depreciation exceeded what relative inflation differentials alone explain, partly due to India’s inflation being relatively contained.
Undervalued rupee boosted Indian exports by 18% in a year: Implications of undervaluation
Rupee overvaluation makes travelling and studying abroad relatively inexpensive, although imported goods, such as mobile phones, electronics, oil, and gas, become cheaper, making inflation somewhat easier to control.
However, when the rupee is overvalued, exports are affected because goods abroad become more expensive, causing an increase in the trade deficit.
On the contrary, when the rupee is undervalued, crude oil, gas, and electronic goods imported from abroad become expensive. Petrol and diesel prices rise, leading to higher inflation.
However, an undervalued currency boosts exports and helps to bridge the trade deficit. Indian goods become cheaper abroad. Moreover, it becomes cheaper for foreign investors to purchase property or shares in India, boosting investment.
An interesting example of this can be understood from a June 2026 Commerce Ministry dataset.
The Commerce and Industry Ministry dataset indicated an 18% jump in goods exports during May compared to last year. This increase was owed to a 10% decline in INR during the last 12 months, in addition to a partial recovery in exports to the West Asia region.
India’s trade deficit also swelled from $22.56 billion in 2025 to $28.21 billion in May 2026. While goods exports increased by 18% to $45.2 billion from $38.3 billion in May 2025, imports also surged by 20.62% to $73.41 billion.
In a press briefing on 15th June 2026, Commerce Secretary Rajesh Agarwal said that exports to West Asia in May 2026 have almost reached the level of last May despite disruptions in that region.
In May this year, India’s exports to the UAE surged by 3.18% and to Saudi Arabia jumped by 11.12%. However, the imports from the US increased dramatically by 54.43% in May to $5.87 billion due to India’s increasing energy imports during the West Asia war.
The data indicated that a weaker rupee helped India’s goods exports log a 6-month high.
On 28th July, the Central government released a press release which stated that India has recorded its highest-ever exports in FY 2025-26, reaching a record US$ 863.1 billion, with merchandise exports reaching US$ 441.8 billion and services exports expanding further to US$ 421.3 billion.
It is notable that an excessively strong rupee can also pose a challenge for the economy, impacting exports. But a moderately undervalued rupee can benefit exports and domestic industries.
However, persistent or excessive rupee weakness can cause a sharp surge in inflation and external risks that the RBI monitors.
Since much of the recent rupee value dynamics are attributed to transitory global shocks rather than structural domestic problems, the RBI Governor’s stance suggests room for recovery once external conditions improve, while the central bank stands ready to ensure orderly markets.
The RBI’s assessment essentially implies that the Indian rupee’s current level reflects global headwinds rather than domestic frailty. Rupee remains competitive, undervalued on key metrics, with potential to bolster as shocks fade, without overlooking the need for vigilance on volatility, inflation, and external balance.
On the bright side, India’s rupee becoming cheaper than the Chinese Yuan has handed India an advantage that Indian goods will become competitive with Chinese goods in the foreign market. As their prices decline, India’s penetration in the foreign market will increase.
Furthermore, Indian exports will gain new momentum, with Indian textiles, footwear, medicines, auto parts, and other goods becoming cheaper than the Chinese ones.
Meanwhile, expensive imports will become a headache, but this may boost domestic manufacturing and competitiveness.