IMF reclassifies India’s FX regime as 'floating'

Observing that India’s external trade and FX [foreign exchange] policies have been more aligned with IME 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”.

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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.