IMF likely to alter classification of India's exchange rate regime

By Bhaskar Dutta and Anup Roy

 

The International Monetary Fund is expected to soon announce a change in how it classifies India’s exchange rate regime, according to people familiar with the matter, two years after the Washington-based lender upset the local central bank by suggesting it was intervening too heavily in the currency market.

 

The new description of the country’s de facto currency regime is likely to include references to a crawling peg, the people said, asking not to be identified discussing private matters. A crawling peg involves small and gradual adjustments to a currency to reflect differences in inflation between a country and its trading partner, according to an IMF publication. 

 

The potential reclassification comes at a time when the rupee has become more volatile. The currency plunged to a record low on Friday after the central bank unexpectedly stepped back from defending it as firmly as before. On Monday, it rebounded as the authority returned to support the currency.

 

Indian authorities have repeatedly pushed back against some of the IMF’s assessments. RBI Deputy Governor Poonam Gupta recently argued that excessive currency volatility was not necessarily desirable for countries like India.  

 

“We classify all member countries’ de facto exchange rate regimes based on a uniform methodology,” an IMF spokesperson said in response to a Bloomberg query. “An update to India’s classification will be made available with publication of India’s 2025 Article IV staff report on Wednesday.”

 

A spokesperson for the RBI did not respond to an email seeking comment on the matter.

 

The rupee has fallen about 4 per cent against the dollar this year, the most among Asian peers, as India faces harsh US tariffs on its exports. The currency has also displayed more volatility than it did during the end of former RBI Governor Shaktikanta Das’ term.

 

Under the current Governor Sanjay Malhotra, who took charge in December last year, the central bank has allowed more “two-way flexibility in the exchange rate,” Thomas Helbling, deputy director of the Asia Pacific department at the IMF said in response to a Bloomberg query last month. 

 

Even with this greater flexibility, the central bank has intervened with large dollar sales on a few occasions this year, which have pushed the rupee sharply higher. India holds one of the world’s largest foreign-exchange reserves, now close to $700 billion.

 

In its 2023 annual Article IV country report, the IMF reclassified India’s foreign-exchange regime to a “stabilized arrangement” from a “floating” system, citing excess intervention. It retained that label the following year, saying more observations were required though the currency had depreciated moderately since November 2024.

 

Under Das, the central bank used its reserves and stamp out the rupee’s volatility, turning the currency into one of the most stable in the region.

 

The RBI’s stated position is that it intervenes in the currency market to curb excessive volatility in the exchange rate.