IMF Considering Reclassification of India’s Forex Management Framework

The International Monetary Fund is reportedly reviewing India’s foreign-exchange (FX) management regime and may soon alter its classification, according to a recent Bloomberg report. India is currently placed under a “stabilised arrangement,” a category it was moved to in December 2023 from the earlier “floating” status. The possible reclassification comes amid heightened rupee volatility, particularly since Sanjay Malhotra took charge as the Governor of the Reserve Bank of India.

The RBI has repeatedly disagreed with the IMF’s assessment, calling the current categorisation “incorrect” and “unjustified.”

Despite the debate, the IMF acknowledges that India’s forex reserves are robust. As of November 14, the country’s foreign exchange stockpile rose by $5.54 billion, reaching $692.57 billion. Under its Integrated Policy Framework, the IMF recommends that India allow greater exchange-rate flexibility and limit forex market interventions to moments of severe disruption. This, it argues, could lower the need for heavy reserve buffers, push firms to hedge currency risks more actively, and strengthen overall market development.

However, the Fund also notes that in periods of severe global financial stress, targeted FX interventions by the RBI may be warranted to stabilise markets and shield the economy from inflationary or output shocks.

Source: Economic Times