Is the IMF right on the rupee?

EXCHANGE RATE MANAGEMENT MOVEMENT: OVER DEC 2022-OCT 2025 SHOWS RBI MAY HAVE BEEN TRYING TO KEEP THE RUPEE WEAK

- JAMAL MECKLAI

THE IMF HAS reclassified India's de facto exchange rate regime to "stabilised" from "floating" over the period December 2022 to October 2023. The Reserve Bank of India (RBI) has strongly disagreed with this characterisation, terming IMF's analysis as being extremely short term-over a longer period (say, 2-5 years) the picture would be quite different.

The truth is that political entitiesand both the RBI and the IMF can be thought of as political entities, the IMF perhaps a little less so-will say all sorts to things to further their political goals and to speak to their specific constituencies, so we really don't need to pay attention to any of this. Nonetheless, to understand the reality of the statement, I constructed a chart that shows how the rupee would have behaved since December 1, 2022, if it was a free-floating currency and (a big assumption) it followed the DXY exactly. The graphic shows the surprise.

On December 1, 2022, USD-INR was at 81.02 and DXY was at 105.66.

From the graphic, it is clear that the RBI has been on the job of weakening the rupee full-on. Owing to absent RBI action and with the admittedly imperfect assumption that a free-floating rupee would follow DXY exactly, the rupee would have been a huge 3.7% stronger (on average) than it was in reality. And on October 31, 2023, it would have been at 81.59, 2% stronger than the actual 83.26.