Wahsington: The IMF on Thursday said exchange rate flexibility should be the preferable policy response to help the Indian economy adjust to energy shocks, amid reports that the RBI resorted to massive market intervention to prop up the rupee.
“Our view is that the rupee should be the first line of defence in the face of these shocks. So, allowing the exchange rate to move freely to reflect the impact of these shocks is important to help the Indian economy adjust to the shocks,” IMF Communications Director Julie Kozack told reporters here.
In response to a question from PTI, Kozack said the IMF would recommend monetary policy tightening to preserve price stability if rupee depreciation started to feed into inflation.
According to reports, the Reserve Bank of India had used about USD 90 billion since June this year to prop up the rupee, including through sales to the spot market and currency swaps to absorb surplus liquidity.
“If significant rupee depreciation leads to broad-based increases in inflation, then our advice would be that monetary policy tightening could be considered to preserve price stability, that is, if depreciation starts to feed into inflation,” Kozack said.
She said that more generally, foreign exchange intervention can be appropriate when market conditions become disorderly, which would be consistent with the IMF's integrated policy framework.
“But in the case of India, our view is that exchange rate flexibility remains the preferable policy response,” Kozack said.