IMF reclassifies India's forex regime as 'crawl-like arrangement'

The Fund cites declining RBI interventions but warns that India's FX restrictions and slow structural reforms could hinder long-term growth

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The International Monetary Fund (IMF) has reclassified India’s de facto (in practice) exchange rate regime as “crawl-like arrangement”, signalling that the Reserve Bank of India (RBI) is allowing the Rupee to gradually weaken while still intervening to limit sharp volatility. This marks an improvement from the Fund’s earlier reclassification of India’s exchange rate as “stabilised arrangement” from “floating” label in 2023, indicating the central bank was intervening too much and too often to keep the domestic currency within a narrow band. However, both “crawl-like” and “stabilised” arrangements are categorised as “soft peg” and not “floating” arrangements.

 

“The exchange rate of the rupee is determined in the interbank market, where the Reserve Bank of India (RBI) intervenes frequently. The RBI’s stated intervention objective is to curb excessive volatility. India’s de jure (official) exchange rate arrangement is floating, and its de facto (in practice) exchange rate arrangement is classified as a crawl-like arrangement,” the IMF staff 2025 report on India presented to its board noted.

 

The IMF staff report said the period considered for a potential reclassification of the de facto arrangement is any six-month span beginning from the onset of a new trend, as observed since the arrangement was last classified.

 

Observing that India’s external trade and FX [foreign exchange] policies have been more aligned with IMF staff’s advice than in the recent past, the report, however, noted that “significant (though generally declining) FXI [FX intervention] has continued in periods not marked by destabilising risk premia, potentially impeding the exchange rate’s role as an absorber of external shocks”.

 

Mooting greater exchange rate flexibility, the IMF said: “While the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility, with interventions limited to periods of destabilizing risk premia, considering India’s relatively low FX mismatch, well-anchored inflation expectations, and generally deep FX market.”

 

The Indian authorities have maintained that the Rupee and US dollar exchange rate has been market determined without the targeting of any particular level. “They (Indian authorities) felt that exchange rate movements largely reflected India’s favorable fundamentals, with interventions, if and when undertaken, aimed at containing excessive volatility,” the staff report noted.

 

In a statement to the IMF staff authored by officials, led by India’s executive director on the IMF board Urjit Patel, it was submitted that the RBI’s exchange rate policy has remained consistent over the years, and is focused on maintaining orderliness and stability, without compromising market efficiency.

 

“Accordingly, FX interventions, if and when undertaken, aim at smoothening excessive volatility rather than targeting any specific exchange rate level or band. The exchange rate is largely determined by market forces. As in the past, exchange rate flexibility continues to be the first line of defense in absorbing external shocks,” the statement emphasised.  

 

Flags LRS curbs

 

The IMF staff report also signaled that some of the restrictions imposed by Indian authorities on current international transactions, including the tax collected at source (TCS) on outflows under the Liberalised Remittances Scheme (LRS), required the approval of the Fund’s executive board under obligations India has accepted in 1994.  

 

It highlighted the exchange restrictions arising from the TCS for personal remittances and payments for educational, medical, and travel services under the LRS. In 2023, the government had raised the TCS on outward remittances under the LRS from 5 per cent to 20 per cent to track high-value transactions and deter large capital outflows.

 

Other restrictions included a 5 percent tax on payments above the annual Rs 1 million threshold for medical services and education (excluding education payments financed by loan), and a 5 per cent tax on payments for travel services (overseas packages) below the annual threshold of Rs 1 million, and 20 percent tax thereafter, to the extent that it applies to cross-border payments to a non-resident seller.

 

“The Executive Board has not approved these restrictions,” the staff report underlined.

 

Other restrictions it flagged related to the non-transferability of balances under the India-Russia debt agreement, restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries and a restriction on the transfer of amortization payments on loans by non-resident relative.

 

Structural reforms critical

 

Underlining the importance of structural reforms to support India’s ambition of becoming an advanced economy, the IMF said there was a need to safeguard economic stability and activate all engines of growth including labour, capital, and productivity. 

 

“India needs to boost all growth engines to become a more open, dynamic, and innovative economy with better factor allocation across sectors and firms,” the IMF report said.

 

In the short term, the IMF said that India can implement reforms to remove trade restrictions, implement the new labour codes, and continue the public investment push among others. In the medium term however, deeper reforms will be needed in agriculture, land, and the judicial system, along with efforts to strengthen education, skills development, health, access to credit, and social safety nets, IMF said.

 

The IMF warned that a sharp decline in household confidence, potentially induced by heightened uncertainty, weakening stock market performance, or tightening of bank lending standards, could weigh on private consumption.

 

Stressing that sustaining high potential growth and sufficient job creation requires strong structural reforms, the IMF said, “Priorities include high and efficient public investment, labor market flexibility, streamlined regulations, and trade and investment liberalization to boost competitiveness and attract FDI.” 

 

The report, while noting recent labour market and goods and service tax (GST) reforms, said that significant challenges remain for India including relatively low per capita income, elevated public debt. It said that the handover from public to private investment as a growth engine remains to be achieved and that high-quality employment benefits only a small group of India’s growing labor force.