IMF Set to Revise India’s Exchange Rate Classification

Post by : Bianca Suleiman

The International Monetary Fund (IMF) is gearing up to announce a revision in the classification of India’s exchange rate regime, indicating a possible transition to a “crawling peg” system, as reported by sources close to the situation. This follows two years of scrutiny from the IMF regarding the Reserve Bank of India’s (RBI) substantial market interventions.

A crawling peg allows for gradual currency adjustments in response to inflation discrepancies with trading partners. Analysts suggest this reclassification signifies a shift in India's monetary policy, especially as the rupee has been subject to increased volatility in recent months.

Just last Friday, the rupee hit a historic low after the RBI moderately relaxed its market defenses, only to see a recovery the following Monday when market interventions resumed. This year, the rupee has depreciated roughly 4% against the US dollar, making it the most weakened currency in Asia. Compounding the issue are rising US tariffs on Indian exports and speculative trading.

Under the leadership of Governor Sanjay Malhotra, who took office in December 2022, the RBI has permitted greater “two-way flexibility” in the exchange rate. Nevertheless, the central bank has intermittently sold substantial amounts of dollars, pushing the rupee upward, utilizing its considerable foreign-exchange reserves, which are currently close to $700 billion.

Earlier in 2023, the IMF revised India’s exchange rate from a “floating” system to a “stabilized” status due to significant interventions observed. This designation continued into 2024 as the rupee showed moderate depreciation, indicating the need for further monitoring.

Indian officials have reiterated that the RBI's interventions are intended to mitigate excessive volatility, not to dictate the currency's value, demonstrating a measured approach to maintaining market stability.

The IMF's updated classification is anticipated to be released alongside India’s 2025 Article IV staff report this week, providing insights into the currency's changing dynamics and the RBI's strategic interventions in the market.