The Reserve Bank of India (RBI) Governor Sanjay Malhotra has made a rare public statement suggesting the rupee may be undervalued, explicitly stating the central bank will "take all necessary steps" to maintain order in the foreign exchange market. This is being interpreted by the market as a clear signal of the RBI's intent to strengthen its intervention stance.

In an interview with Mint newspaper on the 25th, Malhotra stated, "Given the recent depreciation, there is a case to believe that the rupee is not overvalued. If anything, it can be said that the rupee has become undervalued." He emphasized that the RBI does not target a specific exchange rate level but will utilize all tools at its disposal, including its approximately $700 billion in foreign exchange reserves, to curb speculative volatility in the market. The interview was published just ahead of the central bank's monetary policy meeting on June 5th.

Earlier this week, the rupee touched a record low of 96.9650 against the US dollar. It subsequently rebounded, supported by increased central bank intervention, falling oil prices driven by US-Iran talks, and rising market expectations for a rate hike. On Monday, the rupee was trading at 95.29 per dollar, marking a cumulative gain of 1.5% over three days. Despite this recovery, the rupee has still depreciated by approximately 6% year-to-date.

Dhiraj Nim, an economist at ANZ Banking Group, noted that the governor's public comments on the rupee's valuation indicate the "central bank is pulling out all the stops to prevent the rupee's slide amid strong balance of payments pressures," suggesting that recent efforts to defend the currency will continue.

**Unusual Statement, Clear Intervention Signal**

The RBI typically avoids making public statements on rupee valuation or target exchange rate levels, making Malhotra's remarks particularly noteworthy. In the interview, he directly stated, "I want to emphasize—we will take all necessary steps to ensure orderly price discovery in the forex market."

According to a Bloomberg report last week, preventing further rupee depreciation is the RBI's top priority. The central bank is reportedly evaluating several options, including a potential interest rate hike, additional currency swaps, and raising dollars from overseas investors.

Similar signals have been emerging from Indian policymakers recently. Chief Economic Adviser V. Anantha Nageswaran stated last month that the rupee is "undervalued from a fundamental perspective" and "offers an attractive entry point for long-term investors."

The rupee's sustained depreciation this year is primarily due to persistent outflows of equity capital. Data shows that foreign capital outflows from Indian stock markets have exceeded $23 billion this year, surpassing the record level for the entirety of last year. An index measuring the rupee's competitiveness against other currencies fell to 90.96 in April, its lowest level since 2014. A reading below the benchmark of 100 indicates the rupee is in an undervalued range relative to a basket of currencies.

**Inflation Pressure Builds, Market Expects Status Quo in June**

Despite earlier external discussions about a possible rate hike, most economists, including Nim, still expect the central bank to keep interest rates unchanged at its June 5th meeting.

The inflation situation is becoming increasingly complex. India's Consumer Price Index (CPI) for April remained below the RBI's 4% target. However, the wholesale price inflation rate has more than doubled from previous levels, rising to 8.3%. Fuel retailers have raised petrol and diesel prices for the fourth time this month, and manufacturers are expected to pass on higher costs to consumers, potentially putting further pressure on retail inflation.

In his interview, Malhotra stated that the central bank's forecasts for inflation and economic growth for the current fiscal year (4.6% and 6.9%, respectively) "certainly need to be revised based on evolving conditions." He also noted that the current balance of payments situation is "not a major concern yet" but "requires coordinated attention from the government, the RBI, and all relevant agencies."