At a time when capital inflows have started rising and the economy is revving up, the International Monetary Fund’s (IMF) directors have agreed that India’s exchange rate flexibility should remain the first line of defense in absorbing external shocks, with foreign exchange interventions limited to addressing disorderly market conditions, the IMF said.
On IMF staff’s recent reclassification of India’s de facto exchange rate regime for the period December 2022 to October 2023, IMF said many of its executive directors noted the “divergence of authorities’ views” with that of staff and encouraged continued staff engagement on this issue, with a few Directors encouraging staff and the authorities to resolve these differences.
The IMF has reclassified India’s “de facto” exchange rate regime to “stabilized arrangement” from “floating” for December 2022 to October 2023 following an article IV review of the country’s policies. The rupee has moved between 80.8 and 83.4 range during the period.
“A few directors explicitly supported the (Indian) authorities’ view that exchange rate stability reflects improvements in India’s external position and that foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals,” IMF said in a report.
India’s foreign exchange reserves touched $ 606.8 billion last week following a surge in capital inflows. IMF directors welcomed that the financial sector remains stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, and adequate capital and liquidity buffers. The Executive Board of the IMF concluded the Article IV consultation with India, it said. “India’s economy showed robust growth over the past year. Headline inflation has, on average, moderated although it remains volatile,” the IMF said. Employment has surpassed the pre-pandemic level and, while the informal sector continues to dominate, formalisation has progressed. The financial sector has been resilient—strongest in several years—and largely unaffected by global financial stress in early 2023, IMF said.
The current account deficit in the FY2022-23 (FY23) widened as the post-pandemic recovery of domestic demand and transitory external shocks outweighed the impact of robust services exports and proactive diversification of critical oil imports. While the budget deficit has eased, public debt remains elevated and fiscal buffers need to be rebuilt. Globally, India’s 2023 G20 presidency has demonstrated the country’s important role in advancing multilateral policy priorities.
“While acknowledging declining systemic financial risks, directors broadly called for continued supervision and the use of prudential tools to preserve financial stability and manage emerging vulnerabilities, including rapid growth in unsecured personal loans. They advised further strengthening of regulatory and supervisory standards and encouraged public banks to continue building capital buffers,” the IMF added. The IMF said growth is expected to remain strong, supported by macroeconomic and financial stability. Real GDP is projected to grow at 6.3 per cent in FY24 and FY25, IMF said.
However, with better-than-expected second-quarter gross domestic product (GDP) print at 7.6 per cent, the RBI, earlier this month, revised its growth estimate upwards to 7 per cent from 6.5 per cent for FY24.
The IMF said its headline inflation is expected to gradually decline to the target although it remains volatile due to food price shocks. The current account deficit is expected to improve to 1.8 per cent of GDP in FY24 as a result of resilient services exports and, to a lesser extent, lower oil import costs, the IMF said.
“Directors commended the Reserve Bank of India’s proactive monetary policy actions and strong commitment to price stability. They agreed that the current neutral monetary policy stance, anchored on a data dependent approach, is appropriate and should gradually bring inflation back to target,” it said.
The IMF said its directors welcomed that the financial sector remains stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, and adequate capital and liquidity buffers. “While acknowledging declining systemic financial risks, Directors broadly called for continued supervision and the use of prudential tools to preserve financial stability and manage emerging vulnerabilities, including rapid growth in unsecured personal loans,” it said. They advised further strengthening of regulatory and supervisory standards and encouraged public banks to continue building capital buffers, it said.
Directors noted that continuing with comprehensive structural reforms can help further leverage India’s favorable demographics and encouraged the authorities to promote job-rich, inclusive, and greener growth, the IMF said.
