Rupee May Appreciate Once West Asia Situation Normalises: RBI Governor

Rupee is expected to appreciate once the situation in West Asia normalises, said Sanjay Malhotra, Governor of the Reserve Bank of India.

The domestic currency is currently undervalued due to the recent decline after the Gulf crisis, he said in an interview with Mint newspaper.

“With the recent depreciation in the rupee, it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued, both in nominal as well as in REER (real effective exchange rate) terms. Once the situation in West Asia normalises, one could very well see the rupee appreciate, as it has during past similar episodes of external-shock-driven volatility,” the governor said when asked about the declining rupee since the start of the war in West Asia.

Against the dollar, the rupee has declined over 6 percent this year and about 5 percent since the start of the Iran war in late February. The rupee is the worst-performing Asian currency this year.

However, Malhotra assured that the central bank “will do whatever is required to ensure orderly price discovery in the forex market”.

“We have enough tools in our kit. We have sufficient forex reserves — $700 billion or so — and other measures that we can deploy to quell any undue speculative movement,” he said.

He pointed to the measures taken by the central bank to regulate “undue speculation” in the forex market.

The governor acknowledged that there could be some pressure on the current account deficit. Still, controlled gold imports and resilient services exports are expected to ease the pressure.

Remittances, a major source of dollar inflow, are also expected to face minimal impact, Malhotra said.

The governor expressed optimism that this crisis would help India strengthen its energy security.

“We have never allowed a crisis to go waste. We need to — and I am confident that we shall — use the West Asia crisis too as an opportunity and expedite measures for energy security and the long-term improvement of our balance of payments,” he said.