RBI's justified opposition to IMF classification of India's exchange rate

The RBI is the custodian of the country's foreign exchange reserves and manages exchange control. The RBI Act stipulates that the Central Government orders the rate at which the RBI shall buy or sell forex to banks.

The IMF's Article IV review considers a country's current and medium-term outlook and policies. The IMF's report said that the movement suggested "intervention likely exceeded levels necessary to address disorderly market conditions".

In December 2023, the International Monetary Fund (IMF) reclassified India's exchange rate regime from "floating" to "stabilized arrangement" for the period between December 2022 and October 2023.

The IMF's reclassification was based on the Reserve Bank of India's (RBI) likely interventions. The IMF disagreed with India's perspective, emphasizing the need for a flexible exchange rate. The IMF also called the RBI's currency intervention excessive, while the RBI opposed the IMF's reclassification, calling it "unjustified" mentioning that it has adhered to SDDS(Special Data Dissemination Standards) in a transparent manner while intervening in the forex market for orderly movement of INR vs USD.

The above graph of Trade deficit trend juxtaposed to Indian Rupee vs US Dollar trend over the last 3 years clearly shows that the inverted correlation between these two continue without extended breaks. This belies the IMF argument of Rbi's intervention being excessive.In the year 2022 there was a huge pull out from Indian Stock markets by foreign investors and in 2023 there was a reversal in investing by foreign investors in Indian markets.Despite this sudden higher inflow of US Dollars into the economy, RBI has not allowed volatality to set in the forex markets.

Forex experts will know that Current account deficit to GDP has also shrunk to 1% of GDP in Q2 of FY 24 from 3.8% in the same Q2 of FY23.

The above graph showing the movement of currencies INR vs USD and IDR (Indonesian Rupiah)vs USD over the last one year, buttresses the RBI point that its intervention is limited only to the orderly movement of INR vis a vis US Dollar.

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