India hits out at IMF on "excessive" currency intervention comment

India hits out against the International Monetary Fund (IMF) for claiming that the central bank had interfered "excessively" in the foreign exchange market.

The IMF's report suggested that the Indian government was attempting to manipulate the value of the rupee.

What does the IMF's report show?

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The Washington-based lender said that between December 2022 and October 2023, the rupee's value fluctuated within an extremely small range.

The report indicates that the central bank's involvement "likely exceeded levels necessary to address disorderly market conditions."

As a result, the IMF stated that it has reclassified India's foreign currency regime from a "floating" system to a "stabilised arrangement."

What's the difference?

In a floating system - a currency's value is determined by the foreign exchange market based on the demand and supply of the particular currency.

In contrast, in a stabilised arrangement or a fixed regime, a country's government, through its central bank, determines the currency rate.

But top Reserve Bank of India (RBI) officials have repeatedly stated that the bank intervenes in the currency market only to reduce volatility.

In reality, no country sits back and watches its currency take a roller-coaster ride. Almost every central bank intervenes.

How can they not? It's a question of economic stability and reducing the currency's volatility.

India's response

The IMF said India referred to the evaluation as "unjustified" and "strongly disagreed" with its report.

In its report, the Fund said: "The RBI strongly believes that such a view is incorrect as, in their view, it uses data selectively."

In 2022, the currency fell about 8%.

Between December 2022 and October 2023, the rupee lost around 2% against the US dollar.

However, the RBI rejected the IMF's assessment, calling the evaluation based on selective data sets referring to the Fund's report from December 2022 to October 2023.

The RBI said that the IMF is using data selectively.

India's central bank said that if the rupee's movement over two to five years is considered, then the assessment and allegation fall flat.

Forex reservesshow a different story

Bloomberg estimates the RBI intervened in the currency market to the tune of $78 billion through those nine months.

Still, the nation's $604 billion foreign exchange reserves tell a different story.

Despite the intervention, India's import cover hovers close to 2021's all-time high of $642.5 billion.

IMF's outlook is not all bad

The IMF called India a bright spot in an otherwise gloomy global economic background.

However, the IMF's outlook must catch up with the RBI's growth projections for this year and next.

Still, the IMF predicts India will contribute more than 16 per cent of global growth.

The Fund said that was a result of economic changes in important areas like infrastructure and digitalisation, which have elevated India to a "star performer" among nations.

In addition, the IMF said in its annual report that attention be paid to restoring fiscal buffers, ensuring price stability, upholding financial stability, and boosting inclusive growth.

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