Does RBI need to listen to IMF on forex?

To minimize the volatility and counter currency depreciation, central banks have been selling dollars from their reserves. Photo: Reuters
To minimize the volatility and counter currency depreciation, central banks have been selling dollars from their reserves. Photo: Reuters


  • The IMF recently asked central banks of emerging economies to use their forex reserves prudently and allow the exchange rate to adjust.

What has been the trend so far?

With the US Dollar Index surging above the 113 mark amid the strengthening US currency, the rupee slid to a new low of 83.073 on 20 October. The rupee has now weakened by approximately 11.36% in this calendar year while the Dollar Index has zoomed from 96.21 on 3 January to 113.08 on 20 October. The Dollar Index measures the value of the US dollar against a basket of six currencies— euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona. However, current week’s numbers show one US dollar equal to 81.901, and the Dollar Index at 109.71.

How has the rupee performed?

Multiple interest rate increases by the US Fed has affected countries worldwide. While the rupee has depreciated by approximately 11.36% in 2022, other currencies have also slumped. The Japanese yen is weaker by 26.90%; pound sterling 15.76%; euro 12.09%; Argentine peso 51.09%; and Chinese yuan 12.91%. Interestingly, the Indian rupee has appreciated versus some foreign currencies— the rupee is up against the pound sterling by 7.08%; euro by 3.42%; and yen by 13.11%. Currencies which have been more stable than Indian rupee are the Indonesian rupiah, the Singapore dollar, and the Hong Kong dollar.

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How have central banks responded?

To minimize the volatility and counter currency depreciation, central banks have intervened in the forex market and have been selling dollars from their forex reserves. While India has spent 13.9% of its forex reserves, countries such as France, Germany, Italy, Spain, South Korea have used less in terms of both percentage and absolute numbers.

What was the IMF’s advice to countries?

The IMF, in its most recent World Economic Outlook update, lowered India’s economic growth forecast for 2022 to 6.8%, citing reasons such as lower than expected Q1FY23 growth and external headwinds. With the US dollar strongly appreciating, the IMF also urged emerging economies to preserve vital foreign exchange reserves to deal with potentially worse outflows and turmoil in future. As stated by the IMF, a sharp strengthening of dollar has sizable macroeconomic implications for all countries.

Should the RBI go by the IMF advice?

In the background of increasing global inflation and slowdown in world trade, export performance has been unsatisfactory. Revised IMF growth projections show that India’s major exports markets are expected to either record meagre growth or contract. Had the RBI not intervened, depreciation would have been much steeper. However, the RBI need not heed the IMF’s advice as long as it is comfortable in terms of its import capacity for at least six months.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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