IMF SAYS GREATER EXCHANGE RATE FLEXIBILITY WARRANTED TO HELP ABSORB EXTERNAL SHOCKS FOR INDIA

Published on Feb 28, 2025 12:15

International Monetary Fund or IMF stated in its latest Article IV consultation with India that greater exchange rate flexibility is warranted to help absorb external shocks, with intervention limited to addressing disorderly market conditions. Given India�s relatively low foreign exchange (FX) mismatch, well-anchored inflation expectations, and a generally deep FX market, the FIT framework should be supported by greater exchange rate flexibility, allowing the currency to adjust in response to external shocks while maintaining domestic price stability. However, during periods of global financial stress leading to destabilizing premia, foreign exchange intervention or FXI can play a supporting role to improve market functioning and mitigate adverse impacts on output and inflation. Greater exchange rate flexibility would reduce the need for holding costly precautionary FX reserves, promote FX market development, prevent moral hazard by encouraging firms to actively manage their currency risk through hedging, and reduce fluctuations in domestic financial system liquidity.