IMF reclassifies India's exchange rate regime to 'stabilised arrangement' due to RBI's forex interventions

The International Monetary Fund (IMF) has revised India's exchange rate regime, shifting it from a "floating" status to a "stabilised arrangement" for the period between December 2022 to October 2023. This adjustment was made following a comprehensive assessment of the country's policies during the IMF's annual Article IV review.

Reason for Reclassification

The reclassification was prompted by the Reserve Bank of India's (RBI) apparent involvement in the foreign exchange market, where the Indian Rupee moved in a "very narrow range" against the US Dollar. The movement suggested "intervention likely exceeded levels necessary to address disorderly market conditions", IMF said in the report.

Article IV takes into account a country's current and medium-term outlook and policies.

The IMF in its consultation report said India's exchange rate stability "reflects improvements in external position" and noted that "foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals."

Between December 2022 and October 2023, the rupee oscillated between 80.88 and 83.42 against the US Dollar. However, since October, this range has reduced to 82.90-83.42, with anticipations of volatility reaching their lowest in more than a decade. RBI Governor Shaktikanta Das emphasised in October that currency market interventions shouldn't be viewed in binary "black and white" terms, citing the necessity to curb volatility and bolster reserves.

"India's forex reserves are assessed at just above 100 percent of the IMF composite reserve adequacy metric. Going forward, a flexible exchange rate should act as the first line of defense in absorbing external shocks," the fund said.

Economic Growth Projections, Inflation Concerns

The IMF projected India's economy to grow at 6.3 percent for the current and next fiscal, a lower forecast than the RBI's 7 percent for the current year. It also stated India's potential for higher growth and stressed the need for comprehensive reforms to leverage labour and human capital effectively.

Addressing inflation, the IMF anticipated a gradual decline in headline inflation, although persistent volatility due to food price shocks persisted. November recorded retail inflation at 5.55 percent, surpassing the central bank's 4 percent target due to erratic food prices.

Regarding fiscal matters, the IMF urged India to pursue ambitious medium-term consolidation efforts in light of heightened public debt levels. While welcoming the immediate approach of boosting capital spending, the fund recommended a simultaneous tightening of the fiscal stance.

The Centre aims to limit the fiscal deficit to 5.9 percent for the current fiscal year, aiming to reduce it to 4.5 percent by 2025-26.

India to Contribute Over 16% to Growth

As per the IMF, India is expected to contribute over 16 percent of global growth as economic reforms in key sectors like infrastructure and digitalisation made India a "star performer" among countries.

The IMF in its annual Article IV consultation report on December 18 said India is "underpinned by prudent macroeconomic policies" and is on track to be among the major world economies.

It also recommended policies that should be prioritised including fiscal buffers, ensuring price and financial stability, and inclusive growth.