👌IMF is biased – The Hindu BusinessLine–editorial

https://www.thehindubusinessline.com/opinion/editorial/imf-is-biased/article67673888.ece

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/imf-is-biased/article67673888.ece

Deriding forex policies of emerging economies is bad

The IMF has been unfair to India. In its recent Article IV review, it has reclassified India’s de facto exchange rate management to ‘stabilised arrangement’ from ‘floating’ for the period between December 2022 and October 2023, while maintaining the de jure classification as ‘floating’. This is reminiscent of the US Treasury’s currency manipulator list, which is intended to nudge partner countries to allow their currencies to be ‘market-driven’, possibly at the cost of their trade and financial stability.

India was placed in the currency manipulator list in December 2020 and removed from it a year later. Instead of pointing fingers at emerging economies’ moves to shield their economies, multilateral organisations such as IMF could start a dialogue on how countries with reserve currencies can exercise greater responsibility and acknowledge the far-reaching impact of their monetary policies. Multilateral organisations and advanced economies should appreciate the challenges faced by emerging economies in managing their currencies in the interests of ensuring economic and financial stability. They should be cognisant of the balance of payment turbulence caused by monetary policies of the OECD bloc.

The IMF’s observation that India’s exchange rate regime is not floating — based on the mere fact that the rupee moved in a narrow range between December 2022 and October 2023 — lacks basis. The RBI has maintained that it does not target any specific exchange rate, and that it intervenes in the foreign exchange market only to tackle undue volatility. In the period mentioned in the report, the rupee was moving in a narrow band between 81 and 84 against the dollar, but the dollar too was quite stable during that period. The dollar index moved similarly in a narrow range between 100 and 105, thus reducing volatility in the dollar-rupee exchange rate. The stability of the rupee could have been due to narrowing net imports, buoyancy in services exports and foreign portfolio investors aggressively purchasing Indian stocks. The RBI did use the dollar inflows, in the above-mentioned period, to add to its forex reserves, which had declined following the turbulence caused by central banks of advanced economies increasing rates sharply since early 2022. The dollar purchases were primarily to replenish the reserves, with the rupee stability being an unintended effect. With the 12 per cent increase in forex reserves in the above-mentioned period, the import cover is now relatively comfortable at above 10 months.

The IMF’s Article IV discussions should translate into useful recommendations on monetary, fiscal and exchange rate policies. That said, other aspects of the report, such as reviewing the monetary policy and fiscal management of India, are quite balanced. The larger truth is that the role of multilateral bodies has come down over the years. And these kind of biased observations don’t serve to enhance their credibility.

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