IMF’s big move: India’s forex framework reclassified; move comes amid rupee weakness

India’s exchange rate framework came under renewed global scrutiny on Wednesday after the International Monetary Fund reclassified the country’s “de facto” regime as a “crawl-like arrangement”, two years after designating it “stabilised”. The change follows an IMF review conducted earlier this year and could shape how global investors read India’s approach to managing the rupee and its appetite for volatility, according to Reuters.In its assessment, the IMF said, “while the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility.” The rupee has weakened about 4% so far this year, with volatility rising under Sanjay Malhotra, who took charge as Reserve Bank of India governor late last year. The currency touched a record low of 89.49 to the US dollar on November 21, partly due to steep US trade tariffs that have hurt trade and inward portfolio flows.The IMF defines a crawl-like arrangement as one where the exchange rate stays within a 2% margin relative to a statistically identified trend for six months or more, except for specified outliers, and cannot be treated as floating. It earlier moved India to “stabilised” from “floating” for the period between December 2022 and November 2024.Greater currency flexibility, the fund said, would help India absorb external shocks, reduce the need for costly reserve accumulation and support market development. Although the RBI continues to intervene to smooth sharp swings, the rupee’s one-year realised volatility has climbed above 5%, compared with under 2% before Malhotra became governor. The increased tolerance for volatility has also prompted more active hedging by local companies, which analysts say strengthens resilience to global shocks. Malhotra has maintained that the RBI does not target a specific rupee level and intervenes only to curb excessive volatility.On the broader outlook, the IMF projects India’s economy to grow 6.6% in 2025–26 and 6.2% the following year. It said recent tax reforms reducing levies on hundreds of consumer items would help cushion the blow from high tariffs. The US has imposed duties of up to 50% on Indian imports, affecting exports and sectors from textiles to chemicals. Faster structural reform and new trade deals could lift growth, the IMF said, while geopolitical fragmentation and extreme weather pose risks.The fund added that India’s central bank has room to cut rates further with inflation low, and recommended that the federal government’s fiscal consolidation plan for the financial year beginning April 1, 2026, be calibrated to the impact of tariffs.