IMF Reclassifies India’s Exchange Rate Regime
IMF’s Reclassification of India’s Exchange Rate Regime
The International Monetary Fund has reclassified India’s “de facto” exchange rate regime to a “stabilized arrangement” from “floating” for December 2022 to October 2023 after an article IV review. This move has faced pushback from the central bank.
IMF’s Analysis of RBI’s Forex Interventions
The IMF reclassification followed the Reserve Bank of India’s likely forex interventions, where the rupee traded in a very narrow range, suggesting intervention likely exceeded levels necessary to address disorderly market conditions, according to the IMF report.
Central Bank’s Response to IMF’s View
The RBI strongly believes that the IMF’s view is “incorrect” and “unjustified.” Governor Shaktikanta Das emphasized that currency market interventions should not be seen as “black and white.”
Impact of Forex Interventions on Rupee Volatility
Between December 2022 and October 2023, the rupee traded between 80.88-83.42 against the U.S. dollar. This has since narrowed to 82.90-83.42, with volatility expectations falling to the lowest in over a decade.
Expert Opinion on RBI’s Currency Market Interventions
“Our view has been that the intervention-led reduction in rupee volatility in recent months has been extraordinary,” said Dhiraj Nim, forex strategist at ANZ.
Benefits and Concerns of Forex Interventions
Aside from building forex reserves, the intervention may also help reduce the currency risk from the central bank’s inflation fight, according to Nim.
IMF’s Projections for India’s Economy
The IMF also projected India’s economy to grow at 6.3% in both the current fiscal year and the next, below the RBI’s forecast of 7% in the current year.
IMF’s Recommendations for India’s Economic Policies
The fund called for India to pursue “ambitious” medium-term consolidation efforts given elevated public debt levels, while welcoming the near-term approach of accelerating capital spending amid a tightening fiscal stance.
