IMF reclassified India’s de facto exchange rate regime to stabilised arrangement from floating

The International Monetary Fund (IMF) has reclassified India’s de facto exchange rate regime from “floating” to “stabilised arrangement” for the period December 2022 to October 2023, while the de jure classification remained “floating” after an article IV review. Meanwhile, it said that India’s potential growth rate is much higher, provided reform initiatives are accelerated.

Under Article IV review, a staff team from the IMF visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. Based on these, they prepare a report, which forms the basis for discussion by the Executive Board.

Capital inflows

The staff noted that over the past two years, the rupee-dollar had moved significantly, depreciating by about 15 per cent between December 2019 and November 2022. Over the past year, improved domestic macroeconomic stability, supported by tightening monetary policy, has helped attract capital inflows.

Based on foreign exchange data the RBI publishes on a monthly basis, they found that the central bank has been using foreign exchange to cushion the impact of external shocks, smooth market volatility, preclude the emergence of disorderly market conditions (DMC), and opportunistically replenish its FX reserves.

However, “during December 2022–October 2023, the rupee-dollar exchange rate moved within a very narrow range, suggesting that FXI likely exceeded levels necessary to address disorderly market conditions,” the report noted, prompting them to change the category.

The IMF staff diverged from the Indian authorities’ view that “exchange rate stability reflects improvements in India’s external position” and that “foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals.” The RBI strongly believes that such a view is “incorrect” and “unjustified,” the report said. Governor Shaktikanta Das said in October that currency market interventions should not be seen as “black and white.”

Commenting on the discussion in the Executive Board, the IMF said: “Regarding staff’s recent reclassification of India’s de facto exchange rate regime for the period December 2022 to October 2023, many directors noted the divergence of authorities’ views with that of staff and encouraged continued staff engagement on this issue, with a few directors encouraging staff and the authorities to resolve these differences,” a press note issued by the IMF said.

Further, it mentioned that a few Directors explicitly supported the authorities’ view that exchange rate stability reflects improvements in India’s external position and that foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals

Growth rate

Meanwhile, the fund said that India’s potential growth rate is much higher, provided reform initiatives are accelerated. It also mentioned that India’s growth is expected to remain strong.

“Growth is expected to remain strong, supported by macroeconomic and financial stability. Real GDP is projected to grow at 6.3 per cent in FY2023/24 and FY2024/25,” the multilateral body said. Further, headline inflation is expected to gradually decline to the target, although it remains volatile due to food price shocks. The current account deficit is expected to improve to 1.8 per cent of GDP in FY2023/24 as a result of resilient service exports and, to a lesser extent, lower oil import costs. Going forward, the country’s foundational digital public infrastructure and a strong government infrastructure programme will continue to sustain growth.

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

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