RBI Governor says rupee is undervalued as central bank raises key interest rate

The rupee depreciated 22 paise to 96.57 against the U.S. dollar in early trade on Wednesday, October 7, 2026, after the Reserve Bank of India raised the key benchmark policy rate by 25 basis points to 5.5%. Reserve Bank of India Governor Sanjay Malhotra told reporters in Mumbai that the rupee may be undervalued based on estimates like the Real Effective Exchange Rate, even as the currency inched towards an all-time low against the dollar. Malhotra assured that the banking regulator will support the currency to find its correct value while preventing excessive volatility. At the interbank foreign exchange market, the rupee opened at 96.37 before losing ground, following Tuesday's close of 96.35 against the dollar. The RBI's rate hike marks a reversal from its previous policy action, as the central bank last hiked the repo rate in February 2023 before keeping it unchanged through 2023-24 and beginning a rate-cut cycle in 2025. Market analysts said the rate hike reflects rising cyclical inflation risks, while the shift in stance to calibrated tightening highlights the Monetary Policy Committee's hawkish approach alongside higher growth and inflation projections. Radhika Rao, Senior Economist and Executive Director at DBS Bank, noted that the October hike acknowledges that cyclical inflation risks are no longer benign and that wider rate differentials and a tightening bias bolster the currency's resilience to external shocks despite a stronger U.S. dollar remaining a headwind. The rupee has faced ongoing pressure this year, compounded by the West Asia conflict that began in late February and caused a spike in crude oil prices. Brent crude traded higher by 0.97 percent at $101.56 per barrel in futures trade, while the dollar index stood higher by 0.25 percent at 102.09. To counter currency depreciation, the RBI previously introduced a concessional swap facility for diaspora deposits and bond issuances. Banks mobilized nearly $133 billion under the FCNR(B) deposits facility alone, offering temporary relief before renewed pressure emerged in recent sessions. Meanwhile, domestic equity markets saw declines, with the Sensex trading 149.14 points lower at 72,918.67 and the Nifty declining 93.45 points to 22,682.65. Foreign Institutional Investors offloaded equities worth ₹2,961.30 crore on a net basis on Tuesday.

Context

Central banks typically adjust key lending rates and intervene in foreign exchange markets to manage inflation and curb excessive currency volatility during periods of external economic stress. Higher interest rates can help stabilize domestic currency value by attracting foreign capital inflows, though they also raise borrowing costs across the wider economy.