The Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday, 7 October 2026, said financial markets often behave irrationally in the short term and indicated that multiple valuation indicators point to the Indian rupee being undervalued — not overvalued — even as market participants continue to price in further depreciation. His remarks came at the post-policy press conference in Mumbai following the Monetary Policy Committee's (MPC) decision to raise the benchmark repo rate by 25 basis points (bps) to 5.50 per cent.

What the RBI Governor Said on the Rupee

Responding to questions on why currency surveys and hedging activity persistently reflect a depreciation bias, Malhotra argued that market perceptions and positioning do not always capture the true underlying value of a currency. 'Only in the long run are markets able to find the right value,' he said.

The Governor specifically cited the real effective exchange rate (REER) as one of several metrics suggesting the rupee is not stretched on the upside. 'By a number of estimates, including the REER, rupee is not overvalued, may be undervalued,' Malhotra said. Analysts have long noted a divergence between India's ability to attract foreign capital inflows when needed and the persistent bearish positioning on the currency in forward markets.

The Rate Hike Decision

The MPC, in its October 2026 review, voted to raise the repo rate by 25 bps to 5.50 per cent, citing a challenging global environment. Consequently, the Standing Deposit Facility (SDF) rate stands adjusted to 5.25 per cent, while the Marginal Standing Facility (MSF) rate and the bank rate move to 5.75 per cent.

The hike reverses a stretch of rate stability. The August 2026 policy meeting had been the fourth consecutive meeting at which the MPC held both the rate and its neutral stance unchanged. Before that, rates were left untouched in June, April, and February 2026, following a 25-bps cut in December 2025 that had brought the repo rate down to 5.25 per cent. Prior to that easing, the rate had been held at 5.50 per cent through the October 2025 review.

Context: Market Depreciation Bias vs. Fundamentals

The disconnect Malhotra addressed is a recurring tension in currency markets. Hedging data and forecaster surveys have, for several quarters, pointed to expectations of rupee weakness — yet India's current account dynamics and periodic capital inflows have repeatedly prevented a sustained slide. Critics of this market consensus argue that short-term positioning often overshoots, particularly when global risk sentiment shifts abruptly.

Notably, the October rate hike — bringing the repo back to exactly where it stood before the December 2025 cut — signals that the MPC views the current global environment as materially more uncertain than it did nine months ago, warranting a tighter stance even as inflation concerns remain in focus.

What to Watch Next

Markets will now digest how the rate reversal affects bond yields, the rupee's near-term trajectory, and credit costs for borrowers. The RBI's next policy review will be watched closely for any signals on whether Wednesday's hike is a one-off recalibration or the beginning of a tightening cycle. Any further movement in global risk factors — particularly US Federal Reserve guidance and crude oil prices — is likely to influence the MPC's next move.