Mint Explainer: What is the fuss about India’s forex regime

livemint.com:

reclassified India’s de facto exchange rate regime from “floating" to “stabilised arrangement" for the period from December 2022 to October 2023 after a recent review of the country’s policies. The assessment, published in a country report on 19 December, was contested by executive director for India at the IMF, Krishnamurthy V Subramanian, who was previously chief economic adviser to the Union finance minister.

In a statement that forms part of the report on India, Subramanian and his advisers wrote that the “characterisation of India’s exchange rate as a ‘stabilised arrangement’ is incorrect and inconsistent with reality". Mint breaks down what may have led to IMF's assessment and the reasons for India's reaction.

Analysing the Reserve Bank of India monthly data on foreign exchange intervention (FXI), IMF concluded that movement of the rupee-US dollar exchange rate was within a very narrow range during December 2022-October 2023, suggesting that FXI likely exceeded levels necessary to address disorderly market conditions. The assessment noted that in the preceding period–between December 2019 and November 2022–the rupee had depreciated 15%, with RBI using FXI to cushion the impact of external shocks, smooth market volatility, preclude the emergence of disorderly market conditions, and opportunistically replenish its FX reserves.

“The observed stability of the exchange rate prompted staff to reclassify India’s de facto exchange rate regime from ‘floating’ to ‘stabilised arrangement’ for that period, while the de jure classification remained ‘floating’," IMF stated in its country report. Subramanian stated that exchange rate flexibility would continue to be the first line of defence in absorbing external shocks, with