India well-Placed to Absorb Increased Rupee Volatility: IMF

Chennai: India is well placed to absorb increased rupee volatility with more two-way exchange flexibility, said the IMF.

“As for rupee volatility, we would argue that India is well placed to absorb increased volatility with more two-way exchange flexibility,” the IMF said. In two-way flexibility, the currency is free to appreciate or depreciate based on market forces of supply and demand.

“On the one hand, there are not many balance sheet mismatches. The pass-through from exchange rate movements into inflation is very small, and India's forex markets are quite deep. So, all the three main factors which would argue constitute the case for EXI are not that prominent in India, and so it would benefit from more exchange rate flexibility”, it said.

Answering a question on rupee stability, IMF spokesperson said: “Since (RBI) Governor (Sanjay) Malhotra is in office, we have seen more two-way flexibility in the exchange rate. We have also seen less intervention. As to the assessment of the de facto exchange rate regime, this is not a continuous assessment. It's done in regular time windows. So, in the next Article IV, which will be completed next month, de facto exchange rate regime will be reassessed. It's too early to speculate what that assessment will be, given the developments I just mentioned”.

In the Regional Economic Outlook, IMF had said that the exchange rates are an important shock absorber, especially with real shocks such as tariff or other trade shocks, and they can play a stabilizing role. They can be a buffer and help to mitigate the impact. For this reason, the IMF recommended that India continued with a policy more efficient.