IMF’s reclassification of India’s exchange rate faces rejection from ratebanks Reuters

© Reuters. Customers buy fruits and vegetables at an open-air evening market in Ahmedabad, India, August 21, 2023. REUTERS/Amit Dave/File Photo

Author: Ira Dugal

BENGALURU (Reuters) – The International Monetary Fund has reclassified India’s “de facto” exchange rate regime to a “stabilized arrangement” from “floating” for December 2022 to October 2023 following an Article IV review, with the central bank rejecting the move.

The IMF’s reclassification followed likely foreign exchange interventions by the Reserve Bank of India, with the rupee trading in a “very narrow range, indicating that interventions are likely to exceed the levels necessary to address disorderly market conditions,” the IMF said in a report.

The IMF’s Article IV Consultation Report assesses the country’s current and medium-term economic policy and outlook.

IMF staff disagreed with the Indian authorities’ view that “the stability of the exchange rate reflects an improvement in India’s external position” and that “exchange interventions have been used to avoid excessive volatility not warranted by fundamentals”.

The RBI strongly believes that such a view is “incorrect” and “unwarranted”, the report said. Governor Shaktikanta Das said in October that interventions in the currency market should not be seen as “black and white”.

The RBI and India’s finance ministry did not immediately respond to requests for comment.

From December 2022 to October 2023, the rupee traded between 80.88-83.42 against the US dollar. It has since narrowed to 82.90-83.42, with volatility expectations falling to the lowest level in more than a decade.

“Our view is that the intervention-led reduction in rupee volatility in recent months has been extraordinary,” said Dhiraj Nim, forex strategist at ANZ.

“While one can guess why the RBI prefers such a narrow trading band, it appears to be overkill,” Nim said.

But aside from building foreign exchange reserves, the intervention can also help reduce currency risk from the central bank’s inflationary fight, Nim said.

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

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

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

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

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

The fund urged India to pursue “ambitious” medium-term consolidation efforts in the face of elevated public debt levels, while welcoming a short-term approach to accelerating capital spending amid tightening fiscal policy.

The federal government’s fiscal deficit is targeted at 5.9% for the current fiscal year, with the goal of reducing it to 4.5% by 2025–26.