How consistent is IMF’s classification of exchange rate arrangement and data adequacy?

In its latest assessment, the International Monetary Fund (IMF) has revised the way it classifies India’s exchange rate arrangement, shifting it from “stabilised” to “crawl-like.”

- SOUMYA KANTI GHOSH

The IMF, in fact, reclassified, in 2009, just after the global financial crisis, the various exchange rate arrangements that were in vogue in 1998. The 2009 classification had two primary changes. First, it made a clear demarcation capturing the outcome of actual exchange rate policies on a de facto basis as opposed to the announced or de jure arrangement. Second, it specified the exact margin of fluctuation of the home currency around a reference rate for a particular exchange rate regime, and any movement beyond the margin would result in a change in classification.

Thus, to quote the IMF: “A stabilised arrangement of currency entails a spot market exchange rate that remains within a margin of 2 percent for six months or more... and is not floating.” In contrast, in a crawl-like arrangement, the exchange rate must remain within a narrow margin of 2 per cent relative to a statistically identified trend for six months or more... and the exchange rate arrangement cannot be considered as floating.

Against this background, the IMF’s decision to relabel India’s exchange rate arrangement from stabilised to crawl-like reflects a meaningful shift in how the global community might interpret the behaviour of the Indian rupee and the Reserve Bank of India’s (RBI's) approach to currency management. Interestingly, according to the IMF, the de-facto and de-jure exchange rate arrangement have remained different since December 2022.

Let us look into India’s exchange rate on a historical basis and the classification that the IMF has followed since 1999. We also map the exchange rate depreciation and the RBI intervention in the foreign exchange market during such periods. This will give us an idea of whether the central bank has been leaning with the wind or against it.