RBI Calls Rupee Undervalued at Levels Last Seen in 2013

RBI Governor Sanjay Malhotra told Business Line on 26 July that the Indian rupee is not overvalued and could be argued as undervalued in both nominal and real effective exchange rate terms. The remark landed while the currency traded near 95.7-96 per dollar after months of pressure from oil prices, geopolitics and capital outflows.

Central bankers rarely volunteer a fair-value view. Malhotra’s line has therefore drawn sharp attention to the REER data that back it and to the last time the rupee looked this cheap in trade-weighted terms.

What Malhotra Said

In the full Business Line interview, Malhotra listed four points on the currency. Emerging-market peers had also weakened since the West Asia conflict. India’s fundamentals were not the driver. The medium-term external outlook looked favourable. And RBI policy stayed unchanged: no target rate or band, intervention only to curb excess volatility.

He then added the valuation sentence: “I would like to reiterate that it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued both in nominal and in REER (real effective exchange rate) terms.”

He pointed to a current-account surplus of $2.8 billion in April-May 2026 against a $4.1 billion deficit a year earlier, stronger services exports and remittances, goods export growth, and net FDI of about $6.5 billion in the first two months of the fiscal year.

The REER Numbers Behind the Call

REER adjusts the nominal exchange rate for inflation differences against a basket of trading partners. A reading below the long-run average signals the currency has become cheaper in real terms, aiding exporters and making imports costlier.

The BIS real broad effective rate series shows the June 2026 print at 90.15 after a May low of 88.00. Different base years and baskets produce different absolute levels, yet every recent print sits well below its own historical mean.

How 2013 Looks Familiar

The last time the 6-currency REER fell below 90 for a sustained stretch was the 2013 taper tantrum. Then, as now, portfolio outflows and dollar strength drove the slide more than domestic inflation or growth collapse.

1. 2013 taper episode: REER dropped below 90; rupee hit then-record lows near 68-69 per dollar before stabilising once Fed communication clarified and India raised rates and attracted flows.
2. Late 2024 peak: 40-currency REER near 108-118 range in some series before the multi-quarter slide began.
3. March-April 2026 trough zone: 6-currency REER near 89.6-89.7; USD/INR briefly past 95 and tested higher.
4. June-July 2026: Fresh capital measures, $32 billion bank mobilisation, and Malhotra’s public undervaluation language.

An HDFC analysis of REER recovery patterns after sub-90 readings found that since 2000 a print below 90 occurred in only 46 of 316 months. In 78% of those cases the rupee rose over the next 12 months (median +4%). Nifty returns in the following year averaged +37% and were positive 91% of the time. Those are historical frequencies, not forecasts, yet they explain why the current levels matter to long-only investors.

Exporters Gain Ground While Importers Absorb Costs

A cheaper real exchange rate lifts the competitiveness of Indian goods and services abroad. IT, pharmaceuticals, textiles and engineering exporters receive more rupees per dollar of revenue. Tourism and education services also become relatively cheaper for foreign buyers.

• Merchandise exporters see improved price power against Asian peers that have also weakened but often from higher inflation bases.
• Services exporters, already strong in the current-account data Malhotra cited, gain a further edge.
• Oil and gold importers face higher landed costs in rupees; the same pressure hits firms with large dollar payables or unhedged external debt.
• Foreign portfolio investors who already hold Indian equities or bonds see the foreign-currency value of their positions reduced, even as new money can enter at a lower currency valuation.
• Domestic consumers of imported goods or fuel feel the pass-through if oil stays elevated.

The net effect is a classic terms-of-trade shift: the tradeable sector benefits, the non-tradeable and import-intensive sectors pay more until the currency finds a new equilibrium or oil eases.

Capital Measures Already Delivered $32 Billion

Malhotra reported that banks had mobilised almost $32 billion after the June policy package, mostly through FCNR(B) deposits. Government securities drew more than $7 billion in foreign inflows since 5 June. Durable liquidity rose by about ₹1.2 lakh crore, though government balances and swaps delayed the full reflection in system liquidity.

Key inflow snapshot

• ~$32 billion total bank mobilisation, largely FCNR(B)
• >$7 billion into government securities after the FAR expansion and tax changes
• $6.5 billion net FDI in the first two months of FY27
• Current-account surplus of $2.8 billion in April-May

He dismissed significant recirculation of existing deposits and said RBI hedges the exchange risk on the FCNR scheme by investing the dollars in foreign assets. The package was framed as a response to geo-political pressure on emerging markets rather than a permanent new regime.

That same capital-market confidence has shown up in large domestic listings. The SBI Funds Management IPO that pulled in $31 billion in bids earlier in July illustrated continued appetite for Indian financial assets even while the currency was under pressure.

Markets Read the Comment as a Comfort Signal

On X and in dealer chat the dominant reading has been straightforward: RBI is comfortable with current levels and will not spend reserves aggressively to push the rupee back toward earlier ranges. The rare public valuation statement itself becomes an expectations anchor. Traders note that once West Asia tensions ease and oil softens, the same fundamentals Malhotra listed (services surplus, remittances, improving FDI) can support a rebound without heavy official buying of rupees.

Some still flag near-term risks. Oil remains volatile. Dollar strength tied to Fed policy can keep pressure on the entire EM complex. Equity outflows or delayed FDI could test the new floor. Yet the governor’s language removes one source of uncertainty: the market no longer has to guess whether RBI views 95-96 as a crisis zone.

The Pattern Leaves Room for Both Caution and Opportunity

The 2013 episode did not reverse overnight. It required clearer global policy signals, domestic rate action and a return of flows. Today’s package of FCNR incentives, G-sec access expansion and tax changes is already pulling money. Inflation remains the primary RBI mandate; Malhotra repeated that price stability comes first and growth second. The next MPC meeting in August will test how the committee balances the two if food or fuel prints rise.

For now the data line up with the governor’s words. The rupee is cheaper in real terms than it has been for most of the past decade. History says such readings have often marked attractive entry points once the immediate shock fades. Whether 2026 follows the 2013 script depends on oil, geopolitics and the durability of the $32 billion already booked.