2023-12-21 18:55:07
What does the IMF classification mean?
The IMF has said that the RBI has followed a stable exchange by restricting volatility from December 2022 to October 2023 through its currency market interventions rather than letting the rupee be determined by market conditions, which should ideally happen in a system given its stated exchange-rate policy.
What is RBI’s stated exchange rate policy?
Since March 1993, RBI has adopted the market-determined exchange-rate regime. All foreign exchange receipts could be converted at market-determined exchange rates.
Its currency market intervention is guided by…The RBI has been undertaking interventions to curb volatility arising due to demand-supply mismatch in domestic foreign exchange market. Sales in the foreign exchange market are guided by excess demand conditions. Similarly, the Reserve Bank purchases dollars from the market when there is an excess supply pressure due to capital inflows. The nature and level of intervention determines the rupee value.What is India’s defence?
India’s stable currency is driven more by fundamentals like the narrowing of the current account deficit and strong capital flows, which the RBI uses to build forex buffers. Market analysts highlight the need to look at the issue holistically because the period from early 2022 has been exceptional due to geopolitical tension in Europe and the surge in dollar index.
How would a stable exchangerate regime impact markets
A stable exchange rate regime would imply that the RBI will have to maintain a stable currency even if flows are volatile, which would mean excessive dollar purchases when flows are strong and conversely sales when there are outflows. Its impact would be that imports would turn expensive and exports cheaper.
Will it come in the way of monetary policy conduct?
In a stable exchange-rate regime, export competitiveness could be hit because unit value of export would be lower. There could be an impact on capital flows that fund the current account. This is because returns for a foreign investor wouldn’t be attractive as they may not see much appreciation in returns in stable-rate regime.
Does the IMF view really matter to the RBI’s forex policy framework?
The International Monetary Fund’s view is not binding on the government or the Reserve Bank of India as there is no transactional relation with the multilateral body and, hence, there are no conditions that India needs to adhere to.
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