The Reserve Bank of India (RBI) has recently indicated that the Indian rupee may be undervalued, a stance that carries significant implications for the nation's economy. This perspective arises amid concerns over the rupee's depreciation against the US dollar and its potential effects on inflation and economic growth.
In the fiscal year 2025-26, the RBI reported a record income of 4.28 lakh crore, a 26% increase from the previous year. A substantial portion of this income, approximately 1.41 lakh crore, was generated through the sale of foreign currency reserves. This strategy was employed to stabilize the rupee, which had weakened by about 10% against the US dollar during the year. The RBI's intervention involved selling $195 billion in foreign currency, resulting in an exchange gain of 1.69 lakh crore, a 52% increase from the previous fiscal year.
The RBI's actions to defend the rupee have broader economic implications. Selling foreign currency to purchase rupees can lead to a reduction in rupee liquidity, potentially causing short-term interest rates to rise. To mitigate this effect and maintain liquidity, the RBI purchased government bonds worth nearly 9 lakh crore, earning 1.18 lakh crore in interest. Additionally, the RBI paid out 19163 crore in interest on short-term operations to manage the immediate impact of its currency interventions.
Economists have noted that the rupee's undervaluation could offset some of the adverse effects of higher American tariffs on Indian goods. However, this situation also highlights structural challenges in India's economy, such as a persistent goods trade deficit and reliance on foreign portfolio investments (FPIs). The Economic Survey 2025-26 pointed out that the rupee's valuation does not accurately reflect India's strong economic fundamentals, suggesting that the currency is "punching below its weight."
Looking ahead, the RBI faces the challenge of balancing currency stabilization efforts with the need to control inflation and support economic growth. While a weaker rupee can make exports more competitive, it also increases the cost of imports, particularly crude oil, leading to higher production costs and inflationary pressures. The RBI's future policies will need to address these complexities to ensure economic stability.