India's "clash" with the IMF: What are the platforms for India's three-way payments?

Written by Rong Yang and originally reported by Observer.com

On 31 December, Nikkei Asia published a story entitled "India and IMF clash over rupee stability". The report highlighted the differences between the IMF and India over the management of the rupee, with the IMF arguing that India is over-intervening in the exchange rate and India strongly disagreeing with this view, arguing that the assessment is unfair. Markets are concerned that the dispute could destabilise international financial markets.

As part of the Article IV consultations with India, the IMF released an annual report on the state of the Indian economy, covering the period December 2022 to October 2023, on 18 December. The report points out certain fundamental strengths of the Indian economy, mentioning that headline inflation is showing a moderate decline, the current account deficit is expected to improve and future growth prospects remain solid.

The Article IV Consultation is the IMF's regular annual assessment of the economic performance and macroeconomic policies of its member countries. Usually, the consultations end well for countries with no problems, but this time it was the conflict over the rupee that surprised market participants. In this report, the IMF adjusted India's real exchange rate regime from 'floating' to 'stabilising arrangements'. The Indian Express reported on the 19th that the Reserve Bank of India (RBI) had objected to this classification.

Currently, the IMF's classification of exchange rate arrangements divides countries into three broad categories and one residual, totalling ten sub-categories. These classifications are ordered from smallest to largest exchange rate flexibility: hard pegs, soft pegs (including stabilisation arrangements), floating exchange rates (both floating and free-floating), and other management (a residual item that cannot be classified under any of the above).

The report notes that the IMF believes that India has moved from a market-determined floating exchange rate regime to a state-controlled exchange rate management regime. In addition, India has intervened in the sale of dollars more than IMF officials consider necessary.

According to the IMF report, "exchange rate flexibility should be the first line of defence against external shocks and intervention should be limited to addressing market dislocation." However, during the period covered by the report, "the rupee's exchange rate fluctuated within a very narrow range against the US dollar, suggesting that foreign exchange interventions (FXIs) may have exceeded the level required to address market dislocations."

However, the RBI said the IMF's categorisation of changes to India's exchange rate regime was "incorrect and unrealistic" and "strongly disagrees with the IMF staff's assessment". Indian officials have countered the report by arguing that the IMF does not understand India's domestic needs and that the central bank must actively manage rupee volatility as imported inflation is a key factor affecting India's overall inflation.

According to RBI, the IMF uses data selectively and its assessments "are short-term, limited to the last 6-8 months. The IMF staff's assessment would be inadequate if viewed from a long-term perspective of 2-5 years." The Indian media noted that between December 2022 and October 2023, the rupee fluctuated between 80.88 and 83.42 against the US dollar. Since then, the range has narrowed to 82.90-83.42, with the expected volatility falling to its lowest point in more than a decade.

The Nikkei Asia website points out that the seemingly sudden eruption of conflict between India's positioning as a leader of emerging countries in the global South and the IMF had actually been forewarned. in 2022, the rupee fluctuated sharply against the US dollar in a range of 73 to 83, and since the beginning of 2023, the range has changed to 81-84. "Even professional analysts such as IMF staff like professional analysts may suspect that the current market is being manipulated."

The report analyses that how RBI handles the exchange rate in the future will be a factor in foreign investors' decision to invest more. Even with a lower rupee exchange rate, limited volatility makes it easier for investors to predict returns and mitigate risk, thus making investment more viable. Conversely, if any intervention ceases, a depreciation of the rupee will push up the prices of imported goods but will also make the Indian manufacturing sector, which has grown aggressively in recent years, more competitive for exports.

Original title: "Clash between India and IMF"

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