NEW DELHI: India on Tuesday hit out at the International Monetary Fund (IMF) after the agency claimed that the Reserve Bank of India (RBI) had excessively intervened in the foreign exchange market, suggesting an attempt to influence the value of the rupee.
The IMF argued that from December 2022 to October 2023, the rupee’s movement was too restricted, indicating that the central bank’s intervention may have been more than necessary to address market issues.
As a result of an Article IV review, the IMF reclassified India’s exchange rate regime from “floating” to “stabilized arrangement” for the mentioned period. However, the Reserve Bank of India (RBI) resisted this change.
The IMF report highlighted the RBI’s interventions in the foreign exchange market, stating that the rupee’s narrow trading range suggested excessive intervention beyond what was required to manage market conditions.
The IMF disagreed with the Indian authorities’ perspective that exchange rate stability resulted from improvements in India’s external position and the need to prevent unwarranted volatility.
Governor Shaktikanta Das of the RBI contested this viewpoint, stating that currency market interventions should not be seen in absolute terms.
The RBI strongly believes that such a view is “incorrect” and “unjustified”, the report said. Governor Shaktikanta Das said in October that currency market interventions should not be seen as “black and white.”
During the period from December 2022 to October 2023, the rupee traded between Rs 80.88 and Rs 83.42 against the US dollar, narrowing to Rs 82.90- Rs 83.42 afterward. The volatility of the rupee has fallen to the lowest level in over a decade.
ANZ’s forex strategist, Dhiraj Nim, expressed the opinion that the reduction in rupee volatility through intervention has been exceptional, although it seems to be excessive.
Apart from building forex reserves, the intervention might also help mitigate currency risk in the central bank’s efforts to combat inflation, according to Nim.
The IMF recommended a flexible exchange rate as the primary defense against external shocks and projected India’s economy to grow at 6.3% for the current fiscal year and the next, below the RBI’s forecast of 7%.
The IMF acknowledged India’s potential for higher growth with comprehensive reforms and called for ambitious medium-term consolidation efforts to address elevated public debt levels. It also welcomed the near-term focus on accelerating capital spending amid a tightening fiscal stance, with the federal government targeting a fiscal deficit of 5.9% for the current fiscal year and aiming to reduce it to 4.5% by 2025-26.
(With inputs from agencies)
