IMF reclassifies India's exchange rate regime to 'stabilized arrangement'

Following an article IV assessment of the country’s policies, the International Monetary Fund has reclassified India’s “de facto” currency rate regime to “stabilised arrangement” from “floating” for the period December 2022 to October 2023.

The reclassification comes as a result of the Reserve Bank of India’s likely interventions in the foreign exchange market, where the rupee moved in a “very narrow range” against the US dollar, “suggesting intervention likely exceeded levels necessary to address disorderly market conditions,” according to the IMF report.

The Article IV consultation report of the IMF examines a country’s current and medium-term economic policies and prospects.

The IMF stated in a news release that its staff disagreed with Indian authorities’ assessment “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.”

The rupee traded in a range of 80.88-83.42 versus the US dollar between December 2022 and October 2023. Since October, the range has shrunk to 82.90-83.42, with volatility estimates at their lowest in almost a decade.

In October, RBI Governor Shaktikanta Das stated that currency market interventions are not “black and white” and are necessary to reduce volatility and create reserves.

India’s forex reserves are assessed at just above 100% of the IMF composite reserve adequacy metric, the report said.

“Going forward, a flexible exchange rate should act as the first line of defense in absorbing external shocks,” the fund said.

The IMF also projected India’s economy will grow at 6.3% in both the current fiscal year and the next, below the RBI’s forecast of 7% in the current year.

“India has potential for even higher growth, with greater contributions from labor and human capital, if comprehensive reforms are implemented,” the IMF said.

Headline inflation is expected to gradually decline to the target although it remains volatile due to food price shocks, it added.

Volatile food prices pushed up retail inflation to 5.55% in November, above the central bank’s target of 4%.

The fund called for India to pursue an “ambitious” medium-term consolidation efforts given elevated public debt levels, while welcoming the near-term approach of accelerating capital spending while tightening the fiscal stance.

The federal government’s fiscal deficit is targeted at 5.9% for the current fiscal year with an aim to bring it down to 4.5% by 2025-26.

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Prakriti Jash