In a significant move, the International Monetary Fund (IMF) has officially reclassified India's exchange-rate system. This decision comes two years after the Washington-based institution first raised concerns that the country's central bank was excessively intervening in the currency market.
From 'Stabilised' to 'Crawl-Like': What the Change Means
The global lender has now labelled India's de facto currency regime as a "crawl-like arrangement". This marks a clear shift from its previous classification of "stabilised", as detailed in a report released on Wednesday. According to an IMF publication, a crawling peg involves making small, gradual adjustments to a currency's value. These adjustments are designed to reflect inflation differences between a country and its main trading partners.
The IMF stated that the Reserve Bank of India (RBI) "intervenes frequently" in the foreign exchange market. The central bank's stated objective for this activity is to curb "excessive volatility" in the rupee's value.
Renewed Pressure on the Rupee and RBI's Stance
The timing of the IMF's assessment is crucial, as it coincides with renewed pressure on the Indian rupee. The currency recently plunged to a record low last week, prompting the RBI to step back into the market on Monday to steady its fall.
This reclassification also follows years of quiet tension between the IMF and the RBI. India's central bank has consistently pushed back against suggestions that it intervenes too heavily in the currency market. However, market dynamics have shifted since RBI Governor Sanjay Malhotra took over in December of last year. Under his watch, the rupee has been trading more freely, which has led to higher volatility.
So far this year, the Indian rupee has depreciated by approximately 4% against the US dollar. This decline is the most significant among all Asian currencies, exacerbated by harsh US tariffs imposed on Indian exports.
Economic Growth Forecast Amid Trade Challenges
Despite the currency pressures and trade headwinds, the IMF has maintained its growth forecast for the Indian economy. The agency projects that India's economy will expand by 6.6% for the current fiscal year. This forecast is made under the assumption of "prolonged 50% US tariffs" on Indian goods.
The IMF offered a measured perspective on the impact of these tariffs, noting, "While India's export sector is affected by the rise in US tariffs, the overall macroeconomic impact is expected to be manageable." This suggests a belief in the resilience of the broader Indian economy, even in the face of significant trade challenges.
