Does RBI need to listen to the IMF on forex?

Source: The post is based on the article “Does RBI need to listen to the IMF on forex?” published in Livemint on 27th October 2022

What is the News?

The Indian rupee has fallen to a record low against the US dollar. The rupee has been declining against the US dollar and is currently close to inching towards 83.

How have the rupee and other currencies performed against the dollar?

Multiple interest rate increases by the US Fed have affected countries worldwide (The US Federal Bank is increasing interest rates to control inflation).

The rupee has depreciated by approximately 11.36% in 2022, and other currencies have also slumped. The Japanese yen is weaker by 26.90%; the pound sterling by 15.76%; the euro by 12.09%; the Argentine peso by 51.09%; and the Chinese yuan by 12.91%. 

Interestingly, the Indian rupee has appreciated versus some foreign currencies— the rupee is up against the pound sterling by 7.08%; euro by 3.42%; and yen by 13.11%. 

Currencies which have been more stable than the Indian rupee are the Indonesian rupiah, the Singapore dollar and the Hong Kong dollar.

How have central banks responded? 

To minimize the volatility and counter-currency depreciation, central banks have intervened in the forex market and have been selling dollars from their forex reserves. 

While India has spent 13.9% of its forex reserves, countries such as France, Germany, Italy, Spain, and South Korea have used less in terms of both percentage and absolute numbers.

What was the IMF’s advice to countries on this?

The IMF in its most recent World Economic Outlook update has lowered India’s economic growth forecast for 2022 to 6.8%, citing reasons such as the strengthening of the dollar has sizeable macroeconomic implications for all countries.

Should the RBI go by the IMF’s advice? 

In the background of increasing global inflation and a slowdown in world trade, export performance has been unsatisfactory.

However, had the RBI not intervened, the depreciation of the rupee would have been much steeper. Hence, the RBI need not heed the IMF’s advice as long as it is comfortable in terms of its import capacity for at least six months.