IMF Reclassifies India’s FX Regime Amid Pressure On Rupee

The International Monetary Fund has reclassified India’s exchange-rate regime, two years after the Washington-based lender suggested the country’s central bank was intervening too heavily in the currency market. 

The IMF labeled the country’s de facto currency regime as “crawl-like arrangement”, marking a change from the previous “stabilized” classification, the agency said in its annual country report for India released Wednesday.

A crawling peg involves small, gradual adjustments to a currency to reflect inflation gaps between a country and its trading partner, according to an IMF publication.

India’s central bank “intervenes frequently” with the stated objective of curbing “excessive volatility,” the IMF said in the so-called country’s Article IV.

The timing of IMF’s assessment coincides with renewed pressure on the rupee, which hit a record low last week before the central bank stepped back in Monday to steady the currency. It also follows years of quiet tension with the RBI, which has pushed back against suggestions that it intervenes too heavily in the currency market.

India’s rupee has traded more freely since RBI Governor Sanjay Malhotra took over in December last year, leading to higher volatility. That’s a change from the final year of his predecessor, Shaktikanta Das, who tapped the country’s reserves to stamp out the rupee’s volatility. India’s reserves remain among the world’s largest, at nearly $700 billion.

So far this year, the rupee has fallen about 4% against the dollar, the most among Asian peers, as India faces harsh US tariffs on its exports.

Malhotra said in an interview Monday evening that the rupee’s recent weakness was a natural outcome of India’s inflation gap with advanced economies. A 3%–3.5% annual decline is typical for the currency, he said, adding that the RBI’s focus remains on containing excessive volatility.

Indian authorities have repeatedly pushed back against the IMF’s 2023 assessment of the country’s exchange-rate regime as a stabilized arrangement. The central bank argued at the time that the assessment wouldn’t hold up if the currency were evaluated over a longer period.

More recently, RBI Deputy Governor Poonam Gupta criticized the IMF’s framework on exchange-rate management, saying that excessive currency volatility was not necessarily desirable for countries like India.

In the report, the IMF maintained its forecast for India’s economy to grow 6.6% for the current fiscal year through March, under the assumption of “prolonged 50% US tariffs.”

“While India’s export sector is affected by the rise in US tariffs, the overall macroeconomic impact is expected to be manageable,” the IMF said.

Data due Friday may show gross domestic product accelerated 7.3% in the July-September quarter, according to the median of a Bloomberg survey of economists.