Opinion Express View on rupee and Macroeconomic Stability: IMF’s message

Under Article IV of the International Monetary Fund’s articles of agreement, the Fund conducts annual bilateral discussions with members. On Tuesday, it released the annual Article IV country report for India. It details the views of the IMF staff on various macroeconomic issues and discussions with Indian officials on economic development and policies. In this year’s report, two areas warrant closer examination. One, the views on India’s currency regime. And two, the general government debt level.

On the issue of the currency, the IMF staff notes that from December 2022 to October 2023, the rupee-dollar rate “moved within a very narrow range”. During this period, the Indian rupee had fallen marginally. This relative stability, which implies heavy foreign exchange interventions by the Reserve Bank of India, has prompted it to reclassify India’s exchange rate regime from “floating” to “stabilised arrangement” for that period. The overall de jure classification, though, has remained “floating”. In its response, the RBI has stated that the data has been used selectively, that the IMF staff’s assessment was short-term in nature, and that taking a longer view would prove them wrong. The central bank maintained that the rupee is market-determined and that there was “no explicit/implicit target/band”. It also maintained that foreign exchange interventions are used only to curb excessive exchange rate volatility. Thus, the reclassification was “unjustified” in its view. The IMF staff has also argued that an “ambitious” path of fiscal consolidation is needed to rebuild buffers and bring down government debt. As per its estimates, if shocks, similar to the ones that India has witnessed in the past, were to materialise, the baseline carries the risk that “debt would exceed 100 per cent of GDP in the medium term”. In its debt sustainability analysis it has also warned that “long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets.” In response, the executive director for India has noted that the risks stemming from sovereign debt are low “as it is predominantly denominated in domestic currency”. And that despite several shocks, the general government level “has barely increased” — it was 81 per cent in 2005-06, 84 per cent in 2021-22, and 81 per cent in 2022-23.

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On each of these issues, there are points to consider. On the exchange rate regime, there have been periods when the rupee has fallen less compared to other currencies as its decline has been cushioned by forex interventions. However, a flexible exchange rate, as the IMF also notes, would help absorb external shocks. And on the issue of debt, while both central and state governments have brought down their debt and deficit levels from levels seen during the pandemic, they must continue on the path of consolidation.