RBI Governor on Rupee Valuation: Implications for Balance of Payments and Forex Policy

Livemint - Economy · 26 May 2026 · 2 min read
Prelims · Economy Mains · GS3 Economy High relevance

RBI Governor Sanjay Malhotra stated the rupee may be undervalued after recent depreciation, highlighting India's robust external position despite West Asia conflict pressures, with focus on long-term competitiveness measures.

Key points

Rupee Valuation: RBI Governor indicated the rupee may be undervalued after 11% depreciation in FY26, assessing it through both nominal and Real Effective Exchange Rate (REER) metrics.

RBI Intervention Policy: The central bank maintains it only intervenes to curb abnormal volatility, not to target specific exchange-rate levels, aligning with its managed float regime.

[GS3-Economy] Balance of Payments: Despite West Asia conflict elevating crude prices to $100+/barrel, RBI sees India's BoP as manageable with $94.5 billion gross FDI inflows in 2025-26 (+17% YoY).

Current Account Deficit: Services exports and stable remittances may offset crude-driven import pressures, though gold import growth could moderate due to price stabilization.

Capital Flows: Net FDI improved to $7.7 billion (2025-26) from $1.0 billion (2024-25), with expected moderation in repatriations as equity valuations correct.

Energy Security: The West Asia crisis underscores the need for structural reforms in energy import dependence, connecting to India's strategic petroleum reserves and renewable energy transition.

[GS2-Governance] This reflects institutional coordination between RBI, Finance Ministry, and trade bodies to enhance export competitiveness—a key governance issue for external sector stability.

Way Forward: India should accelerate FTAs with key markets, incentivize export-oriented manufacturing under PLI 2.0, diversify energy sources including strategic hydrogen investments, and establish a sovereign wealth fund for forex stabilization.

Key terms

Real Effective Exchange Rate (REER)

REER measures a currency's value against a weighted average of multiple foreign currencies, adjusted for inflation differences. For UPSC, it's critical for assessing trade competitiveness—a depreciated REER (below 100) suggests export advantage, while RBI monitors it to balance external sector stability.

Balance of Payments (BoP)

BoP records all economic transactions between residents of a country and the rest of the world. For UPSC, its components (current account, capital account, forex reserves) are vital for analyzing external vulnerabilities, especially India's chronic current account deficit and FDI-driven capital account surplus.

Managed Float Regime

India's exchange rate system where RBI intervenes selectively to curb excessive volatility while allowing market forces to determine the rupee's value. Relevant for UPSC as it balances monetary policy autonomy (Mundell-Fleming trilemma) with export competitiveness.

Strait of Hormuz

The strategic chokepoint between Oman and Iran through which 30% of global seaborne oil passes. For UPSC, its blockade (as during US-Iran conflicts) directly impacts India's energy security, inflation, and forex reserves due to crude price spikes.