Context: The International Monetary Fund (IMF) reported that the central bank excessively managed the Indian currency in the period December 2022 to October 2023.
IMF Reclassifies India’s Exchange Rate Regime
- Low Movement: The rupee moved in the range of 81.04 per US dollar and 83.29, which is a band of 2.8%. In contrast, the Euro-Dollar rate moved in a band of 7.3% in the same period.
- Exchange Rate Regime: India follows a Managed Floating Exchange Rate system, where the currency exchange rate is largely market-determined, and the central bank (RBI) steps in only to contain volatility in the exchange rate or market.
What is an Exchange Rate?
- It is the value of one nation’s currency versus the currency of another nation or economic zone.
|
- Recommendation: However, the IMF has said that Indian currency was excessively managed, making it a ‘stabilized arrangement’ exchange rate.
- The IMF has suggested moving towards a system that allows greater flexibility.
- Stabilised Arrangement is a situation where the Central Banks intervene frequently to ensure the band of movement of the exchange rate is narrow.
About IMF
- Establishment: IMF was conceived in 1944 at the United Nations Bretton Woods Conference.
- Objective: It is a global organization that works to achieve sustainable growth and prosperity for all.
- Members: 190 countries, including India.
- Headquarters: Washington DC, United States.
- Activity: Its major role are Policy Advice, Financial Assistance and Capacity Development.
- IMF financing helps member countries tackle balance of payments problems. Eg- Sri Lanka, Pakistan etc.
However, experts are of the view that the IMF analysis is incorrect due to the following reasons:
- Strengthening Factors:
-
- India’s trade deficit averaged $20 billion a month, compared to averaged $22.1 billion a month last year.
- The Current Account Deficit at $27.3 billion, was almost half of the $53.5 billion previously.
- There was an increase in foreign portfolio investment (FPI) by around $45 billion.
- The forex reserves also saw a modest increase from $563 billion to $586 billion. .
Factors that can lead to an increase in volatility
- US Policy: An increase in the US Federal Reserve’s policy funds rate made the dollar stronger, which had negative effects on other currencies, including Indian Rupees.
Types of Foreign Exchange Regime
- Fixed Exchange Rate: An exchange rate regime where the government or the central bank determines the country’s official exchange rate with another currency. For Example – The value of 1 Pound to INR in 1947 was fixed at 13.33.
- Floating Exchange Rate: A system where the exchange rate is determined by the market forces of supply and demand.
- Managed Floating Rate: In this system, the country’s central bank occasionally intervenes to ensure the currency is not too volatile. India currently follows this model.
To read more on EXCHANGE RATE SYSTEM
News Source: Live Mint
December 22, 2023
