The International Monetary Fund’s amended classification of the Indian currency regime to `stabilised arrangement’ from `floating’ has turned contentious as it signals that the Rupee was stable more due to intervention than its inherent strength.
India’s central bank has rejected the classification and it has for long maintained that it doesn’t target a level for the local unit against the dollar, but intervenes only to smoothen the volatility.
India’s representative at the IMF K. V. Subramanian doesn’t agree with it either.
The IMF report acknowledges the disagreement within the institution itself.
“A few directors explicitly supported the authorities’ view that exchange rate stability reflects improvements in India’s external position and that foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals,” said the IMF report.
There is no formula in public to conclude how it is arrived at and the classification is more subjective. Thanks to the global financial crisis of 2008 and the subsequent unconventional monetary policies, many institutions that held more faith in the market than in administrators changed their minds.
The IMF has chosen the period from Dec. 2022 to Oct. 23 when the financial markets were volatile and the US witnessed the collapse of a few regional US banks that were ultimately bailed out.
Meanwhile, in Europe, Credit Suisse blew up and had to undergo a forced merger with UBS. These events led to capital outflows across the world and India was no exception.
Indian central bank’s declared currency strategy is that it intervenes only to smoothen the volatility and that it does not target any level. Going by that the intervention is well within what its policy has been for decades.
Foreign exchange reserves are well above $600 billion again and the currency management called for accumulation given the volatility not only because of Federal Reserve’s actions but also due to geopolitical developments.
Policy makers in every country have their priorities and they need not tailor their actions to the philosophies of individuals in multilateral institutions. In fact, those institutions have themselves watered down their theories.
In one such episode – during the taper tantrum of Ben Bernanke in 2013 – India’s currency market intervention received thumbs up from none other than Christine Lagarde, the then Managing Director of IMF.
“Temporary—though aggressive—domestic liquidity support to certain sectors or markets may be necessary, along with targeted foreign exchange interventions,” Lagarde said on March 17, 2015. “In India too, the RBI took decisive action during and after the taper tantrum episode. It provided foreign currency liquidity support to key sectors, allowed the rupee to depreciate, and provided judicious foreign exchange interventions to minimize disruptive movements in the Rupee.”
The latest IMF report may have fuelled debate, but it may be much ado about nothing.
