The International Monetary Fund has reclassified India’s “de facto” exchange rate regime to “stabilized arrangement” from “floating” for December 2022 to October 2023, the first such instance of such reclassification following an article IV review of the country’s policies.
According to the IMF’s staff assessment, forex intervention by the Reserve Bank of India likely exceeded levels necessary to address disorderly market conditions and has contributed to the rupee-dollar moving within a narrow range since December 2022.
The IMF’s article IV consultation report reviews a country’s current and medium-term economic policies and outlook.
In response, India has strongly disagreed with IMF’s staff assessment, saying that such a view is “incorrect” and “unjustified”.
The RBI strongly believes that such a view is incorrect as, in their view, it uses data selectively. In their view, staff’s assessment is short-term and restricted to the last 6-8 months without any rationale for the same, and if a longer-term view of 2-5 years is taken, staff’s assessment would fail. In the authorities’ view, therefore, staff’s reclassification of the de facto exchange rate regime to “stabilized arrangement” is unjustified,” IMF said in its note expressing RBI concern.
The executive director for India at the IMF, K.V. Krishnamurthy Subramanian and his team of advisers also noted that the IMF staff is “incorrect and inconsistent with reality”. They have attributed the rupee depreciation vis-à-vis dollar in 2023 to significant moderation in CAD, the revival of capital flows on the back of a comfortable foreign exchange reserves buffer and India’s macroeconomic stability.
“The global uncertainty, which peaked from December 2019 to November 2022 in the wake of pandemic and the war in Europe, declined as the impact of the shocks was priced in. It is, therefore, not surprising that the rupee-US dollar exchange rate has moved in a narrow band in the recent period.
However, staff have attributed the narrow movement to FXI and labelled the rupee-US dollar exchange rate regime as a ‘stabilised arrangement’,” said the executive director and his team in the IMF report.
Speaking to Mint, Rakesh Mohan, former executive director of IMF from India, also former RBI deputy governor, assured that this reclassification is unlikely to have any impact on India.
This IMF statement is of little practical significance for India. It is no secret that we have always intervened in the foreign exchange market to curb excess volatility and maintain orderly market conditions. The exchange rate remains largely market determined. The IMF classifies an exchange rate regime as a stabilized arrangement when it determines that the exchange rate has not moved beyond a 2% band in 6 months and that this stability has resulted from market interventions rather than market conditions,” added Mohan.
According to data, rupee weakened about 2% against the dollar between December 2022 and October 2023, after falling about 8% in the prior 12 months.
According to Bloomberg, RBI is estimated to have intervened to the tune of $78 billion dollars in those nine months. In the week ended 8 December, India’s forex reserves stood at $606.858 billion.
That said, RBI has consistently maintained that it doesn’t target a level for the rupee, but intervenes in the market to smoothen the volatility.
India was most recently on the US Treasury’s watchlist as a potential currency manipulator in late 2020 and was removed two years later. Speaking at the annual meetings of the IMF and World Bank in Marrakech, Morocco this year, the RBI governor had asked the IMF to review the practise of tagging emerging market countries as manipulators or a stabilized currency or put it on a watchlist.