MUMBAI: The IMF on Wednesday reclassified India’s “de facto” exchange rate regime as a “crawl-like arrangement”, two years after branding it “stabilised”. The move follows an IMF review earlier this year and could influence how global investors interpret India’s foreign exchange framework and its tolerance for volatility.
“While the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility,” the International Monetary Fund said.
The rupee has declined about 4% over the year so far and its volatility has risen under Sanjay Malhotra, who became Reserve Bank of India governor late last year.
The currency hit an all-time low of 89.49 against the U.S. dollar on November 21, in part due to steep U.S. trade tariffs which have dented trade and inward portfolio flows.
‘Crawl-like arrangement’
A crawl-like arrangement is when the exchange rate remains within a “narrow margin of 2% relative to a statistically identified trend for six months or more (with the exception of a specified number of outliers), and the exchange rate arrangement cannot be considered as floating”, the IMF says.
IMF to reclassify India’s FX management framework, Bloomberg News reports
The IMF moved India to “stabilised” from “floating” for the period between December 2022 and November 2024. Allowing greater exchange rate flexibility would help absorb external shocks, reduce the need for costly reserve accumulation and encourage market development, the IMF added.
While the Indian central bank continues to intervene in the FX market to limit outsized swings, the rupee’s 1-year realised volatility has jumped above 5% compared to below 2% before Malhotra became RBI governor.
The RBI’s increased tolerance for volatility has also prompted local companies to more actively manage foreign exchange risks, which analysts say helps enhance economic resilience to global shocks.
Malhotra has said the RBI does not target a specific rupee level and interventions are meant to curb excessive volatility.
Macro outlook
The IMF expects India’s economy to grow at 6.6% in 2025-26 and at 6.2% in the next financial year. Recent tax reforms which brought down levies on hundreds of consumer items are expected to cushion the impact of high tariffs on the Indian economy, it said. The U.S. has imposed tariffs of up to 50% on Indian imports, denting its exports and impacting sectors from textiles to chemicals.
New trade deals and faster implementation of structural reform domestically could boost economy, the fund said, adding that geopolitical fragmentation could be a headwind. Unpredictable weather events could also hurt the economy by impacting crop yields, rural consumption and reigniting inflationary pressures, it said.
IMF directors see room for India’s central bank to cut rates further since inflation remains low and recommended the federal government’s fiscal consolidation plan in the financial year beginning April 1, 2026 be conditional on the impact of tariffs.
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