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RBI Governor Sanjay Malhotra says the rupee now appears undervalued in both nominal as well as REER (Real Effective Exchange Rate) terms.
RBI Governor Sanjay Malhotra. (File Photo)
The Indian rupee may have become undervalued following its sharp depreciation in recent months, Reserve Bank of India (RBI) Governor Sanjay Malhotra has said, while stating that the central bank is prepared to take all necessary steps to ensure orderly movement in the foreign exchange market.
In an interview with MintMalhotra said the RBI does not target any specific exchange rate level for the rupee, but would intervene in the market if speculative pressures emerge.
“The RBI will do whatever is required to ensure orderly price discovery in the forex market,” he said.
The rupee has weakened by around 6% since the outbreak of the Middle East conflict on February 28, amid a sharp rise in global crude oil prices and heightened geopolitical tensions. India, which imports over 85% of its crude oil requirement, remains vulnerable to sustained increases in oil prices as it puts pressure on inflation, the current account deficit and the domestic currency.
Amid the recent depreciation, Malhotra said the rupee now appears undervalued in both nominal as well as REER (Real Effective Exchange Rate) terms. REER is a key metric used to assess the competitiveness of a currency against a basket of trading partners after adjusting for inflation.
“With recent depreciation, one could argue that the rupee has become undervalued, both in nominal as well as in REER terms,” the RBI governor said.
He also indicated that the domestic currency could recover once geopolitical tensions ease. “Once the situation in West Asia normalises, the rupee could appreciate,” he added.
The RBI governor said the central bank has sufficient firepower to tackle volatility in the currency market, including foreign exchange reserves of nearly $700 billion.
“The RBI has enough tools in its kit, including nearly $700 billion in reserves, to quell any undue speculative movement,” Malhotra said.
On the broader macroeconomic front, the governor stressed the need to reduce India’s current account deficit and improve the capital account position. He said the government has already been taking measures in this direction.
Malhotra also reiterated that inflation control remains the RBI’s primary mandate, though the central bank would continue supporting economic growth if the inflation trajectory allows policy space.
“If the evolving inflation trajectory provides policy space, we support growth,” he said.
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