Markets can be irrational in the short run: What RBI Governor Sanjay Malhotra
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The rupee neared its record low after the RBI raised the repo rate to 5.50%. Governor Sanjay Malhotra said the currency may be undervalued, while analysts viewed the hawkish stance and higher inflation outlook as supportive of the rupee.
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Loading...×Rupee dropped closer to a record low against the US dollar on Wednesday after the Reserve Bank of India (RBI) announced its first rate hike in nearly four years. However, the central bank’s Governor Sanjay Malhotra believes that the Indian currency may be undervalued.“Financial markets can be irrational in the short run. It is only in the long run they are able to find the right value," Malhotra said during the post policy press conference. "By a number of estimates, including the REER (real effective exchange rate), the rupee...may be undervalued," he added, while responding to a question on why currency polls and hedging behaviour continued to point to a rupee depreciation bias.
The RBI will ensure that rupee stabilises and finds its value, and the central bank will support the Indian currency in orderly movement in finding its correct value, Malhotra said. “We will ensure there's no excessive volatility.”
Also read | RBI hikes rate, but analysts see shift to ‘calibrated tightening’ as bigger takeaway. How can this impact markets?
The rupee dropped to 96.8450 against the US dollar, nearing its record low of 96.96 hit in May. Market analysts feel RBI rate hike reflects rising cyclical inflation risks while the shift in stance to 'calibrated tightening' alongside higher growth and inflation projections highlights the MPC's hawkish approach.
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What analysts say
The RBI's 25 bps hike to 5.50% is defensible, and the shift to "calibrated tightening" matters more than the rate itself because it rules out near-term cuts, said Sumit Singhania, Head of Research at Bajaj Broking.
“With CPI rising to 4.8% in August and projected at 6% in Q3, at the upper edge of the tolerance band, acting now makes sense. Growth projected at 7.1% gives the economy room to absorb it. The global backdrop adds to the case. The US Fed hiked in September, and markets still price in a further hike by December, with the October 28 FOMC acting as a live risk,” the analyst highlighted, adding that this keeps pressure on the rupee and limits the RBI's room to stay accommodative.
"The RBI's October hike acknowledges that cyclical inflation risks are no longer benign. The change in stance also underscores the RBI MPC's hawkish intent and is reinforced by upward revisions to growth and inflation forecasts," said Radhika Rao, Senior Economist and Executive Director, DBS Bank.
The analyst noted that the combination of higher inflation forecasts and calibrated tightening should keep front-end rates biased higher. The policy shift meanwhile is modestly constructive for the rupee, as wider rate differentials and a tightening bias bolster the currency's resilience to external shocks, even as a stronger US dollar remains a headwind, Rao added.
Also read | Indian rupee FX premiums jump after RBI policy leaves traders bracing for more sell/buy swaps
(With inputs from agencies)
Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
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Figures reflect the source report and its stated period. This article is for information and is not investment advice.
