RBI’s Malhotra: Indian Rupee may be undervalued

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Reserve Bank of India (RBI) Governor Sanjay Malhotra said that the Indian Rupee (INR) may now be undervalued following its recent depreciation, Reuters reported on Monday.

Malhotra further stated that the Indian central bank does not target any specific level for the currency, emphasizing that the RBI stands ready to intervene if speculative pressures build up.

RBI Governor said the central bank has enough tools in its kit, including nearly $700 billion in reserves to quell any undue speculative movement. He added that the RBI's primary mandate is to target inflation. "If the evolving inflation trajectory provides policy space, we support growth,” said Malhotra.

Market reaction

At the time of writing, the US Dollar Index (DXY) is trading 0.21% lower on the day at 95.45.

RBI FAQs

What is the role of the Reserve Bank of India?

The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.

How do the decisions of the Reserve Bank of India affect the Rupee?

The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.

Does the Reserve Bank of India directly intervene in FX markets?

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.