Rupee Nears Record Low: What RBI Governor Sanjay Malhotra’s “Irrational Markets” Comment Really Means

The Indian rupee came under renewed pressure on October 7, moving close to its record low against the US dollar even as the Reserve Bank of India (RBI) delivered a 25-basis-point interest rate hike. The currency’s weakness has raised questions about whether monetary tightening can provide meaningful support to the rupee in the current global environment.

RBI Governor Sanjay Malhotra, however, offered a different perspective. Speaking after the latest monetary policy decision, he said financial markets can behave irrationally over shorter periods and suggested that several measures indicate the rupee could be undervalued.

His comments are important because the rupee’s recent decline is being driven by several forces at the same time, including oil prices, global interest rates, foreign investment flows and dollar strength.

Rupee Moves Close to Its Record Low

The rupee fell to around ₹96.8450 against the US dollar during Wednesday’s trading session, moving very close to its previous record low of ₹96.96 recorded in May. It later ended around ₹96.78 per dollar, highlighting the continuing pressure on the domestic currency.

The move came despite the RBI raising its policy repo rate to 5.50%. The increase was the central bank’s first rate hike since February 2023.

Normally, higher interest rates can make a currency more attractive by improving returns on domestic financial assets. But exchange rates are influenced by many factors, and the latest rupee movement shows that rate policy alone cannot immediately overcome strong external pressures.

Why Did the Rupee Fall Despite the RBI Rate Hike?

One major factor is the international oil market. India imports a large proportion of its crude oil requirements, so a sustained increase in crude prices can increase the country's demand for dollars.

That creates additional pressure on the rupee because Indian importers need foreign currency to pay for energy purchases.

Another factor is the direction of global interest rates. Higher US Treasury yields and a stronger dollar can encourage investors to hold dollar-denominated assets. This can make emerging-market currencies, including the rupee, more vulnerable to capital outflows.

Foreign portfolio investment flows are another important consideration. When overseas investors reduce exposure to Indian equities or other assets, demand for dollars can increase as funds are moved out of the country.

This combination means that even a domestic rate hike may not immediately translate into a stronger rupee.

What Did Sanjay Malhotra Mean by “Irrational” Markets?

Governor Malhotra’s argument was essentially that short-term currency movements do not always represent an economy’s underlying value.

He pointed to the real effective exchange rate, or REER, among the indicators suggesting that the rupee may actually be undervalued. REER attempts to assess a currency’s value against a basket of trading-partner currencies while taking inflation differences into account.

That does not mean the RBI has declared that the rupee must immediately rise against the dollar. Rather, the Governor’s comments suggest that the current market exchange rate may not fully reflect longer-term economic fundamentals.

This distinction is particularly relevant during periods of high global uncertainty, when investors can react rapidly to oil prices, interest-rate expectations, geopolitical developments and changes in risk appetite.

RBI Signals It Wants an Orderly Rupee Movement

The RBI has also made it clear that it wants to prevent excessive volatility in the currency market.

The central bank has been using foreign-exchange market interventions, including dollar sales, to moderate sharp movements in the rupee. Such intervention does not necessarily mean the RBI is targeting a particular exchange-rate level. Its broader objective is to maintain orderly market conditions and avoid disorderly fluctuations.

That distinction matters for investors. A weaker rupee does not automatically mean the RBI will attempt to defend a specific number indefinitely.

Instead, policymakers appear focused on managing excessive volatility while allowing market forces to determine the currency’s longer-term value.

RBI’s New Policy Stance Adds Another Layer

The latest monetary policy decision also contained a significant signal for markets. The RBI increased the repo rate by 25 basis points to 5.50% and shifted its policy stance from “neutral” to “calibrated tightening.”

The move reflects growing concerns about inflation, particularly amid elevated energy costs and broader global uncertainty.

At the same time, the RBI raised its FY2026-27 economic growth forecast to 7.1%, indicating that policymakers continue to see resilience in domestic economic activity.

This creates an interesting situation for the rupee. Higher interest rates and a tightening bias can provide some support to the currency, but external pressures may continue to dominate in the short term.

What This Means for Investors and Consumers

For investors, the key lesson is that the rupee’s daily movement should not be interpreted in isolation.

A currency approaching a record low can create concerns about imported inflation, particularly for commodities and products priced internationally. Companies with significant dollar-related costs may also feel pressure if the rupee remains weak.

On the other hand, exporters can benefit from receiving foreign-currency revenues when converted into rupees, although the overall impact varies significantly from company to company.

For ordinary consumers, the most important areas to watch are imported goods, overseas education, international travel and other expenses linked to foreign currencies.

The Bigger Picture

Governor Malhotra’s comments do not amount to a prediction that the rupee will immediately recover. Instead, they highlight the difference between short-term market pricing and longer-term economic fundamentals.

The rupee remains close to its record low, while oil prices, global bond yields, foreign capital flows and dollar strength remain important risks. At the same time, the RBI has demonstrated that it is willing to use monetary and foreign-exchange tools to contain excessive volatility.

The coming months will therefore be important. If global pressures ease and foreign investment flows improve, the rupee could receive support. If oil prices and dollar strength remain elevated, however, currency volatility could continue.

For now, the RBI’s message is clear: short-term market movements can be extreme, but policymakers expect the rupee to eventually move closer to a value supported by broader economic fundamentals.