IMF's Message on Macroeconomic Stability
- Under Article IV of the International Monetary Fund's (IMF) articles of agreement, annual bilateral discussions with member countries are conducted.
- Recently, the IMF released the annual Article IV country report for India.
- It details the views of the IMF staff on various macroeconomic issues and discussions with Indian officials on economic development and policies.
Key Focus Areas
- Currency Regime
- The IMF notes that from December 2022 to October 2023, the rupee-dollar rate remained stable.
- This stability implies heavy foreign exchange interventions by the Reserve Bank of India.
- And it has prompted a reclassification of India's exchange rate regime from "floating" to "stabilised arrangement" for that period.
- The RBI argues against the reclassification, stating that the rupee is market-determined.
- It also maintained that foreign exchange interventions are used only to curb excessive exchange rate volatility.
- Government Debt Level
- The IMF emphasises the importance of an "ambitious" fiscal consolidation path to reduce government debt.
- There are concerns that debt could exceed 100% of GDP in the medium term if shocks similar to those in the past materialise.
- It has also warned that long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets.
- The RBI argues that sovereign debt risks are low, as it is predominantly denominated in domestic currency.
- And despite several shocks, the general debt level has barely increased.
Way Forward
- While forex interventions have stabilized the rupee, a flexible exchange rate could enhance resilience against external shocks.
- While both central and state governments have reduced debt and deficit levels post pandemic, they must focus on consolidation.