India Hits Out At IMF for Saying Currency Intervention Excessive

(Bloomberg) -- India pushed back against the International Monetary Fund for saying the central bank’s intervention in the foreign-exchange market was excessive, implying that the country was trying to influence the level of the rupee. 

The Washington-based lender said the currency moved within a very narrow range from December 2022 to October 2023, suggesting the central bank’s intervention “likely exceeded levels necessary to address disorderly market conditions.” 

As a result, the IMF reclassified India’s foreign-exchange regime to a “stabilized arrangement” from a “floating” system, it said in its annual Article IV country report released on Monday.

India “strongly disagreed” with the assessment, calling it “unjustified,” the IMF said. The Reserve Bank of India stated that the period was restricted to a short-term, and that the IMF’s assessment would fail over a two- to five-year horizon, the fund said. 

“The RBI strongly believes that such a view is incorrect as, in their view, it uses data selectively,” the IMF said in its report. A RBI spokesperson didn’t immediately respond to text messages seeking further information.

The rupee weakened about 2% against the dollar between December 2022 and October 2023, after falling about 8% in the prior 12 months. The RBI is estimated to have intervened to the tune of $78 billion dollars in those nine months, according to Bloomberg Economics. The country’s FX reserves of $604 billion is approaching the record high $642.5 billion reached in 2021.

Top officials from the RBI have repeatedly said the central bank doesn’t target a level for the rupee, but intervenes in the currency market to smoothen volatility. Indian officials remain sensitive to the issue, though, since the US Treasury has placed India on its monitoring list of potential currency manipulators on and off since 2018. India hasn’t been on the bi-annual watchlist since November 2022. 

During the IMF’s annual meetings in October, RBI Governor Shaktikanta Das criticized the Treasury’s practice of putting countries on the watchlist. He said emerging markets like India need to build up their reserve buffers to offset global risks.

Michael Wan, a senior currency analyst at MUFG Bank Ltd., said it’s unlikely India would be labeled a currency manipulator by the US as the central bank’s intervention hasn’t exceeded 2% of gross domestic product over a 12-month period. 

“Looking ahead into 2024, RBI should ease some control over the rupee,” he said. “The dollar is expected to weaken in 2024, and so RBI should allow the rupee to strengthen in line with peers.”

In its Article IV report, the IMF gave a fairly optimistic outlook for India’s economy, saying it has the potential to grow faster than the fund’s forecast of 6.3% in the current and next fiscal years if the government undertakes key structural reforms.

India needs “ambitious” fiscal consolidation over the medium term in order to curb its public debt, the IMF said in an accompanying statement to its report. The central bank’s current neutral monetary policy stance was “appropriate,” and should help bring inflation back to the 4% target, it said. 

(Updates with details of currency intervention, analyst comment.)

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