IMF recategorises India's exchange rate system as ‘stabilised arrangement'

The International Monetary Fund (IMF) has reclassified India's exchange rate regime from "floating" to a "stabilised arrangement" for the period of December 2022 to October 2023. This decision comes after an Article IV review of India's economic policies, where the IMF observed interventions by the Reserve Bank of India (RBI) in the foreign exchange market.

According to the IMF, the RBI's interventions, particularly between December 2022 and October 2023, resulted in the rupee trading in a very narrow range against the US dollar. 

The IMF suggested that these interventions might have exceeded levels necessary to address disorderly market conditions. This contradicted the Indian authorities' perspective, which attributed exchange rate stability to improvements in India's external position and the use of foreign exchange interventions to prevent excessive volatility.

During the mentioned period, the rupee hovered within a range of 80.88 to 83.42 against the US dollar. However, since October 2023, this range has further narrowed to 82.90-83.42, accompanied by a significant reduction in volatility expectations.

RBI Governor Shaktikanta Das, in October,stressed upon the nuanced nature of currency market interventions, stating that they are essential to prevent volatility and build reserves. India's foreign exchange reserves were reported to be just above 100 per cent of the IMF composite reserve adequacy metric.

Looking ahead, the IMF recommended a flexible exchange rate as the primary defence mechanism against external shocks. 

Despite projecting a growth rate of 6.3 per cent for both the current fiscal year and the next, the IMF's outlook is slightly lower than the Reserve Bank of India's forecast of 7 per cent for the current year.

The IMF acknowledged India's potential for higher growth with increased contributions from labour and human capital if comprehensive reforms are implemented. It also highlighted the need for India to pursue ambitious medium-term consolidation efforts due to elevated public debt levels. 

While endorsing the government's near-term approach of accelerating capital spending, the IMF suggested tightening the fiscal stance to address the fiscal deficit, which is targeted at 5.9 per cent for the current fiscal year with an aim to reduce it to 4.5 per cent by 2025-26.

(With Reuters Inputs)