Rupee falls 22 paise to 96.57 against US dollar after RBI repo rate hike; Sanjay Malhotra says currency may be undervalued

In early Wednesday trading, the Indian rupee declined 22 paise to 96.57 against the US dollar, following the Reserve Bank of India’s (RBI) decision to increase the repo rate by 25 basis points to 5.5 per cent. After opening at 96.37, the currency lost value and slipped to 96.57, down from Tuesday’s closing level of 96.35.

This depreciation followed closely on the heels of the RBI announcing its first repo rate increase since February 2023. The central bank also altered its monetary policy stance from ‘neutral’ to ‘calibrated tightening’, suggesting that rate cuts are unlikely in the immediate future.

RBI Governor Sanjay Malhotra on the rupee

Against the backdrop of the rupee’s weakness, Governor Sanjay Malhotra stated that the currency could be undervalued according to multiple metrics, including the Real Effective Exchange Rate (REER).

Malhotra assured that the RBI would work to stabilise the rupee and keep its movement orderly, avoiding excessive volatility. He remarked that markets may act irrationally in the short term but typically settle at the correct value over the long term.

“According to several estimates, including the REER, the rupee is not overvalued and may actually be undervalued,” Malhotra noted.

The Governor further suggested that the rupee might appreciate if geopolitical tensions, notably the West Asia conflict, were to subside.

What is Pressuring the Rupee?

The Indian currency has been under strain due to high crude oil prices, global uncertainty, and a stronger US dollar. On Wednesday, Brent crude was trading near USD 101.56 per barrel, with the dollar index at 102.09.

As a significant importer of crude oil, India remains exposed to rising energy costs, which raise the nation’s import bill and further strain the rupee.

Outflows from foreign funds have also contributed to the currency’s struggles. Exchange data revealed that Foreign Institutional Investors (FIIs) net-sold equities valued at Rs 2,961.30 crore on Tuesday.

RBI raises repo rate to 5.5%

The RBI’s Monetary Policy Committee voted unanimously to raise the repo rate by 25 basis points to 5.5 per cent from 5.25 per cent. Additionally, the Standing Deposit Facility rate was raised to 5.25 per cent, while both the Marginal Standing Facility and bank rate were bumped to 5.75 per cent.

The central bank has also uplifted its FY27 GDP growth projection to 7.1 per cent, an increase of 40 basis points, with inflation estimated at 5.2 per cent for the financial year.

The rupee’s movement, crude oil prices, foreign fund flows, and global interest rates are expected to remain critical factors influencing the currency in the upcoming sessions.