The IMF hasn't got its analysis of the country's forex regime right

The Fund's remark on India's alleged departure from a floating rate for the exchange of rupees and dollars is unconvincing

- MADAN SABNAVIS

The International Monetary Fund (IMF) this week said that India’s currency was excessively managed by the central bank in the period December 2022 to October 2023, as the rupee moved in a very narrow corridor. Hence, instead of being a “floating" exchange rate regime, it was a “stabilized arrangement" in that period. As a corollary, the Fund’s suggestion is to move to greater flexibility. This view is not binding on anyone, as is the case with any research work. The IMF, however, has not gotten it right.

In any country, intervention is required when there are extraneous factors causing currency volatility. Letting only the market decide its value under such conditions can cause distortions in the balance sheets of companies and noise in money markets. The period in question has been one of considerable volatility in the global dollar index, as the relentless increase in the US Federal Reserve’s policy funds rate made the dollar stronger, which had negative collateral effects on other currencies. In a globalized setting, such effects cannot be avoided and can at best be mitigated through appropriate intervention.

The IMF view may have been acceptable had the rupee been misaligned with fundamentals. These, interestingly, improved significantly during the period in review, and hence there was little reason for the rupee to decline sharply. Let’s take a look at these components.