RBI Governor Sanjay Malhotra Discusses Potential Undervaluation of Rupee and Market Irrationality
MUMBAI: Reserve Bank of India (RBI) Governor Sanjay Malhotra stated that the Indian rupee is currently undervalued and that the central bank will intervene to ensure stability in the currency market. The rupee closed at 96.78 on Wednesday, down 36 paise from the previous close, after hitting a five-month low of 96.85 during the day. Malhotra emphasized that various estimates, including the real effective exchange rate, indicate that the rupee is not overvalued.
Malhotra acknowledged that market behavior can be irrational in the short term, but he expressed confidence that the market would eventually find the correct value for the rupee. He reiterated the RBI’s commitment to support the rupee’s orderly movement and to mitigate excessive volatility.
Global Market Impacts
Malhotra noted that a correction in the valuation of global AI stocks could redirect foreign capital to emerging markets like India. He suggested that such a correction would not significantly harm India and could potentially have a positive effect. However, he also pointed out that US tariffs and the lack of a trade deal could pose challenges, although these might be offset by agreements with other countries.
Despite a strong services trade surplus and robust net remittance receipts, the current account deficit widened in July due to an increase in the merchandise trade deficit. The merchandise trade deficit rose to $58.7 billion in July and August, up from $55.1 billion during the same period last year, primarily driven by higher imports of electronic goods and crude oil.
Foreign Investment Trends
On the external financing front, Malhotra reported that net Foreign Direct Investment (FDI) inflows improved to $13.8 billion in the first four months of the year, compared to $9.6 billion in the same period last year. This increase was attributed to higher gross inflows and a slowdown in outward FDI growth. Malhotra stated that robust gross FDI reflects strong global investor interest in India.
However, Foreign Portfolio Investment (FPI) recorded net outflows of $10.3 billion up to October 5. Malhotra mentioned that capital-flow measures introduced in the June policy have supported inflows, leading to expectations of a healthy surplus in the balance of payments this year.
Trade Rules Clarification
Malhotra clarified that the new trade rules are designed to enhance ease of business and do not impose additional reporting burdens on individuals receiving payments from abroad for software or other services. Small exporters can utilize a self-declaration for bills up to Rs 10 lakh, while banks will manage reporting within the RBI’s system. The objective is to simplify trade procedures while improving the RBI’s data on services exports.
Market Reaction
Following the RBI’s decision to hike interest rates for the first time in over three-and-a-half years, the Sensex experienced a decline after two consecutive sessions of gains. The index closed down 429 points at 72,639, while the Nifty fell 173 points to close at 22,603. On the BSE, the PSU banks and housing finance indices each rose nearly 1%, while the bankex and financial services indices remained relatively unchanged.
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