Reserve Bank of India (RBI) Governor Sanjay Malhotra’s latest remarks on the rupee mark a subtle but important shift in the country’s exchange-rate discourse. The governor’s observation in a media interview that the rupee may now be “undervalued” after its recent slide, coupled with the assurance that the Central Bank will do “whatever is required” to prevent disorderly market conditions, signals a more pragmatic approach to currency management at a time of rising global uncertainty.
The comments come amid renewed stress in global markets, with the rupee weakening sharply in recent weeks, reviving anxieties over imported inflation and the country’s external balances. Yet the RBI’s tone suggests it may no longer see every bout of depreciation as something that must be resisted at all costs. For years, the central bank has formally maintained that it does not target any specific exchange-rate level and intervenes only to curb excessive volatility. In practice, however, markets have often sensed an implicit discomfort with sharp rupee weakness. That preference was understandable. India remains heavily dependent on imported crude oil, foreign portfolio flows, and external financing. A weaker currency raises the cost of imports, widens inflationary pressures, and can unsettle investor sentiment.
Real Cost of Artificial Defense
But defending a currency indefinitely also carries costs. Former Deputy Chairman of the Planning Commission Montek Singh Ahluwalia recently warned that “artificial support” to the rupee could end up weakening the economy itself if it undermines competitiveness and drains reserves. His argument deserves attention. Exchange rates are not merely symbols of national prestige; they are economic prices that must reflect underlying realities. When central banks lean too heavily against depreciation despite adverse global conditions, they risk distorting trade competitiveness and exhausting policy ammunition. This is especially relevant for India at a time when export competitiveness matters more than ever. The correction in the rupee’s real effective exchange rate in recent months may therefore be less a sign of weakness and more a long-delayed adjustment.
Moving Toward Credibility
That does not mean depreciation is painless. A weaker rupee feeds imported inflation, raises fuel and commodity costs, and increases pressure on companies with unhedged foreign borrowings. Given the geopolitical uncertainty around oil markets, the RBI is right to guard against disorderly speculation and panic. But the debate around the rupee often becomes overly psychological. The fixation with certain round numbers — whether 85, 90, or now perhaps even 100 to the dollar — risks obscuring the broader macroeconomic picture. Economist Arvind Panagariya recently argued that “100 is just a number” and that policymakers should not lose sleep over it if economic fundamentals remain sound. He has a point. Exchange-rate levels acquire symbolic significance in public discourse, but currencies ultimately reflect relative inflation, interest rates, capital flows, and global risk sentiment. Obsessing over defending a particular threshold can become counterproductive.
The real challenge for the central bank is credibility. Markets can tolerate gradual depreciation if they believe macroeconomic fundamentals remain intact and policymakers remain in control. What unnerves investors is policy confusion or the impression that authorities are fighting economic reality through unsustainable intervention. By signalling that the rupee is not necessarily overvalued while also reaffirming its willingness to curb speculative excesses, the RBI appears to be striking a more mature balance. The rupee’s weakness should therefore be viewed less as a crisis and more as a reminder of India’s structural vulnerabilities — particularly its dependence on imported energy and volatile portfolio capital. After all, currency management can’t substitute for deeper reforms that strengthen exports, improve productivity, and attract stable long-term investment.