The Reserve Bank has told the International Monetary Fund (IMF) that the objective of frequent interventions in the forex market is to curb excessive volatility, dismissing the Fund’s rationale for reclassifying India’s exchange rate regime.
The IMF, following the Article IV consultation with the Indian authorities, reclassified the status of the exchange rate regime to “stabilised arrangement” from “floating” for period between December 2022 to October 2023.
India’s Executive Director at IMF K V Subramanian and Senior Advisors Sanjay Kumar Hansda and Anand Singh questioned the selection period adopted by the Fund for analysis and also reclassification of the country’s exchange rate regime.
“… (IMF) staff characterisation of India’s exchange rate as a ‘stabilised arrangement’ is incorrect and inconsistent with reality. As in the past, exchange rate flexibility would continue to be the first line of defence in absorbing external shocks, with interventions limited to addressing disorderly market conditions, ” they said in a statement attached with the report.
The Article IV consultation report by the IMF reviews a country’s current and medium-term economic policies and outlook.
The exchange rate of the rupee is determined in the interbank market, where the Reserve Bank of India (RBI) intervenes frequently. RBI’s stated intervention objective is to curb excessive volatility.
“The de jure exchange rate arrangement is classified as floating, while de facto exchange rate arrangement has been reclassified to stabilized arrangement for the period December 2022-October 2023. The reclassification is based on a statistical methodology that is implemented by staff evenhandedly across member countries,” it said.
The methodology follows a backward-looking statistical approach that relies on past exchange rate movement and historical data, it said, adding, therefore, this reclassification does not imply statements or views on future or intended policies nor does it imply a policy commitment on the part of the country authorities.
The rupee traded in the range 80.88-83.42 against a US dollar between December 2022 and October 2023. The volatility in the forex market has narrowed further to 82.90-83.42 against the greenback post October.
Observing that there was significant divergence of views on the exchange rate, the report said “the RBI strongly disagreed with staff’s assessment that Foreign exchange intervention (FXI) likely exceeded levels necessary to address disorderly market conditions and has contributed to the Rupee-USD moving within a narrow range since December 2022. The RBI strongly believes that such a view is incorrect as, in their view, it uses data selectively.” In their view, staff’s assessment is short-term and restricted to the last 6-8 months without any rationale for the same, and if a longer-term view of 2-5 years is taken, staff’s assessment would fail, it said.
“In the authorities’ view, therefore, staff’s reclassification of the de facto exchange rate regime to “stabilized arrangement” is unjustified. They noted that the RBI’s FXI comply with the best principles of transparency since FXI data dissemination in the public domain complies with SDDS standards prescribed by the IMF, and that the rupee continues to be a market determined currency, with no explicit/implicit target/band,” it said.
According to the report, the RBI also stated that they remain committed to their stance of minimizing volatility for financial stability considerations but without any view on the level for the rupee.
Moreover, in RBI’s view, the exchange rate’s stability in 2023 reflects the strength of macroeconomic fundamentals and improvements in India’s external position, particularly significant moderation in the current account deficit (CAD) and revival of capital flows on the back of a comfortable foreign exchange reserves buffer.
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