The International Monetary Fund (IMF) has revised India’s exchange rate regime classification from “floating” to “stabilized arrangement” for the period spanning December 2022 to October 2023, as a result of an Article IV review evaluating the nation’s policies.
The Article IV consultation report is a comprehensive review of a country’s current and medium-term economic policies and outlook.
This reclassification is attributed to likely interventions by the Reserve Bank of India (RBI) in the foreign exchange market, where the rupee demonstrated a “very narrow range” against the US dollar. The IMF report suggests that these interventions may have surpassed levels necessary to address disorderly market conditions.
In a press release, the IMF expressed a divergence from the views of Indian authorities, asserting that the exchange rate stability observed may not solely be attributed to improvements in India’s external position. The IMF contends that foreign exchange interventions were employed not only to avoid excessive volatility but also to a degree not justified by underlying fundamentals.
During the period from December 2022 to October 2023, the rupee exhibited a trading range of 80.88-83.42 against the U.S. dollar. Subsequently, from October onward, this range has further narrowed to 82.90-83.42, accompanied by a significant decrease in volatility expectations, reaching their lowest levels in over a decade.
In October, RBI Governor Shaktikanta Das emphasized the nuanced nature of currency market interventions, stating that they serve the purpose of preventing volatility and bolstering reserves, cautioning against viewing them in absolutes.
The report notes that India’s forex reserves stand just above 100% of the IMF composite reserve adequacy metric.
Looking ahead, the IMF advocates for a flexible exchange rate to serve as the primary defense against absorbing external shocks.
Additionally, the IMF’s growth projection for India’s economy indicates a 6.3% expansion in both the current fiscal year and the following year, falling below the RBI’s more optimistic forecast of 7% for the ongoing fiscal year.
(With inputs from Reuters)
