IMF Shifts India's Exchange Rate Classification
The International Monetary Fund has placed India's foreign exchange framework under the global microscope once again. On Wednesday, the international financial institution officially reclassified the nation's de facto exchange rate regime, moving it from 'stabilised' to a 'crawl-like arrangement'. This significant shift in classification occurred just two years after the IMF had initially designated India's approach as 'stabilised'.
This important change follows a comprehensive review conducted by the IMF earlier this year. According to Reuters, this reclassification could significantly influence how international investors interpret India's strategy for managing the rupee and its tolerance for currency market fluctuations.
What 'Crawl-Like Arrangement' Means for India
In its detailed assessment, the IMF acknowledged that the exchange rate has shown increasing two-way movement this year, but emphasized that there remains room for additional exchange rate flexibility. The institution specifically defines a crawl-like arrangement as a system where the exchange rate remains within a narrow 2% margin relative to a statistically identified trend for six months or more, with exceptions for specified outliers. Such a system cannot be treated as a truly floating exchange rate.
The Indian rupee has experienced noticeable pressure this year, weakening by approximately 4% year-to-date. Market volatility has notably increased under the leadership of Sanjay Malhotra, who assumed the role of Reserve Bank of India governor late last year. The currency touched a concerning record low of 89.49 against the US dollar on November 21, partly driven by steep US trade tariffs that have adversely affected Indian trade and inward portfolio flows.
Broader Economic Implications and Outlook
The IMF has clearly articulated that greater currency flexibility would benefit India in multiple ways: helping absorb external shocks, reducing the need for costly reserve accumulation, and supporting broader market development. Although the RBI continues to intervene to smooth sharp currency swings, the rupee's one-year realised volatility has climbed above 5%, a significant increase from the under 2% levels observed before Malhotra became governor.
This increased tolerance for volatility has prompted more active hedging by Indian companies, which financial analysts say strengthens the economy's resilience to global financial shocks. Governor Malhotra has consistently maintained that the RBI does not target a specific rupee level and intervenes only to curb excessive market movements.
Looking at the broader economic picture, the IMF projects India's economy to grow by 6.6% in 2025–26, followed by 6.2% growth the following year. The institution noted that recent tax reforms reducing levies on hundreds of consumer items would help cushion the economic impact from high US tariffs, which have imposed duties of up to 50% on Indian imports, affecting exports across sectors from textiles to chemicals.
The IMF also highlighted that faster structural reforms and new trade agreements could potentially lift growth further, while warning that geopolitical fragmentation and extreme weather conditions pose significant risks to the economic outlook. Additionally, the fund suggested that India's central bank has room to cut interest rates further given currently low inflation, and recommended that the federal government's fiscal consolidation plan for the financial year beginning April 1, 2026, should be carefully calibrated to account for the impact of ongoing tariff pressures.
