IMF Reclassifies India's Exchange Rate Regime to 'Stabilized Arrangement' Following Article IV Review

BENGALURU: In a recent move, the International Monetary Fund (IMF) has reclassified India's exchange rate regime to a "stabilized arrangement" from "floating" for the period of December 2022 to October 2023. This reclassification comes in the wake of the IMF's Article IV review of India's policies, where it assessed the country's current and medium-term economic outlook.

According to the IMF report, the reclassification is a result of the Reserve Bank of India's interventions in the foreign exchange market, particularly in cases where the rupee demonstrated a "very narrow range" against the US dollar. The IMF suggests that such interventions exceeded levels necessary to address disorderly market conditions.

During the period from December 2022 to October 2023, the rupee traded within a range of 80.88-83.42 against the US dollar. Subsequently, from October onward, the range narrowed to 82.90-83.42, and volatility expectations hit the lowest point in over a decade.

RBI Governor Shaktikanta Das, in October, emphasized that currency market interventions should not be viewed in a "black and white" manner and are essential to prevent volatility and build reserves. The IMF report acknowledges India's forex reserves, assessing them at just above 100% of the IMF composite reserve adequacy metric.

Looking ahead, the IMF recommends a flexible exchange rate as the primary defense mechanism against external shocks. Despite projecting India's economy to grow at 6.3% in both the current and next fiscal year (below the RBI's forecast of 7%), the IMF sees potential for higher growth with comprehensive reforms.

Addressing inflation concerns, the IMF notes that headline inflation is expected to gradually decline to the target, although it remains volatile due to food price shocks. Recent data shows retail inflation at 5.55% in November, exceeding the central bank's target of 4%.

In terms of fiscal policy, the IMF calls for India to pursue an "ambitious" medium-term consolidation effort, given elevated public debt levels. While appreciating the near-term approach of accelerating capital spending, the IMF encourages tightening the fiscal stance. The federal government aims to reduce the fiscal deficit to 5.9% for the current fiscal year, with a further goal of bringing it down to 4.5% by 2025-26.