RBI Governor says the INR now looks undervalued

The INR may now be undervalued after its sharp depreciation, Reserve Bank of India (RBI) Governor Sanjay Malhotra, told Mint in an interview. This comes on the back of an unusually direct intervention from policymakers to intensify efforts to stabilize the currency.

Currency defenses up: The INR touched a record low of 96.96 against the greenback last week before rebounding on heavy RBI intervention, easing oil prices and expectations of tighter monetary policy. The currency strengthened to around 95.40 today, extending a three-day recovery.

Why it matters: The governor’s remarks signal that the RBI is ramping up efforts to contain speculative pressure amid widening balance-of-payments stress. India’s Real Effective Exchange Rate is at a 12-year low of 90.96. Backed by a USD 700 bn forex reserve war chest, the timing offers Gulf capital a major rebate and entry point into Indian assets, insulated by an aggressive central bank backstop — despite USD 23 bn (INR 2.2 tn) exiting Indian equities YTD in 2026. Policymakers are also confronting rising inflation risks with repeated fuel price hikes.

What’s next? The RBI remains ready to do “whatever is required” to ensure orderly currency markets, including deploying a part of India’s roughly USD 700 bn (INR 67 tn) FX reserves, Malhotra said. Next on the lineup is: RBI’s rate decision expected on 5 June. Expect emergency measures — including potential rate hikes or currency swaps — to curb speculation.

Aggressive intervention returns

Bankers estimate the RBI sold between USD 2 bn and USD 3 bn (INR 191 bn-287 bn) on Thursday alone, while state-run lenders continued selling USD aggressively on Friday on behalf of the central bank. Large USD-rupee swap operations aimed at easing pressure in forward markets were also reported. The currency remains vulnerable if the conflict drags on, while expectations of RBI rate hikes are also building.

RBI dividend hits record, misses expectations

The RBI will transfer a record INR 2.8 tn (USD 30 bn) dividend to the government for FY 2026, in a major fiscal buffer for New Delhi but still falling short of market expectations. The payout exceeds last year’s record INR 2.69 tn (USD 28.1 bn), though economists had anticipated a transfer closer to INR 3 tn (USD 31.3 bn).

Fiscal pressure intensifies: The smaller-than-expected surplus comes as soaring oil prices linked to the war strain India’s public finances. Higher energy subsidies and rising import costs are threatening the government’s fiscal deficit target of 4.3% of GDP. The deficit could widen to 4.6% if crude prices remain elevated, potentially forcing spending cuts and higher borrowing.

Rationed call: The dividend was announced while pressure continues to mount on the INR. To accommodate the record payout, the RBI reduced its contingency risk buffer to 6.5% from 7.5%, even as its balance sheet expanded more than 20% in FY 2026.