DISAGREEMENT BETWEEN IMF AND RBI

 Aftermath of the great depression of 1930s resulted in the abandonment of gold standard system.Later the United Nations Monetary and financial conference held at Bretton Woods New Hampshire USA in July 1944 with 44 countries  decided to establish  twin institutions namely International Monetary Fund (IMF) and  World Bank (International Bank for Reconstruction and Development).The IMF has to provide international monetary cooperation, facilitate expansion of  global trade, growth,employment and promote exchange rate stability and orderly exchange arrangements and balance of payment and financial stability in member countries.Regarding exchange rate management Bretton woods agreement introduced a system of convertible currencies at fixed exchange rates and replaced gold standard with the system of US Dollar ( gold at $35 per ounce) for  official reserve purpose.Accordingly individual countries had to fix their exchange rate in terms US$ or equivalent to gold.Broadly exchange rate (the rate at which one currency is exchanged for another  currency) is determined broadly either by 1. fixed, pegged or stable exchange rate system or 2.Flexible or Floating exchange rate system and different variant like full Floating , managed floating etc also did exist.

In 1971 the IMF'S fixed rate system collapsed  primarily due to the inability to maintain the fixed exchange rate between gold and US dollar, US balance of Payments issues, speculative attacks, and the emergence of Floating exchange rate. During the oil crisis of1973  foreign debt of 100 oil importing developing countries increased by 150% between 1973  and 1977.The shift from fixed to more flexible exchange by countries has been gradual.In the beginning most developing countries continued to peg(fix) their exchange rate- either to a single key currency like US dollar or French  Franc or to a basket of currencies. By late 1970s they shifted from single currency pegs to basket pegs including IMF's Special Drawing Rights (SDRs).By 1980s developing countries s hifted away from currency pegs to explicitly more flexible exchange rates. in other words while in 1975 70% of the developing countries followed fixed exchange rate for external trade it had reduced rapidly to just 20%  in 1996.After the introduction of economic reforms in India the budget  for 1992-93 introduced partial convertibility of rupee a dual exchange rate system in which 40% to be surrendered at the official exchange rate and the remaining 60% can be converted at market determined rate which was termed as liberalised Exchange Rate Management System (LERMS).At present according to RBI Indian rupee is a Free- Floating currency which means its value is determined by the free market forces of demand and supply. However many observed that in practice the Floating exchange rate is not a free flexible exchange rate but in effect "managed floating ".Where in frequent intervention by the authorities may lead to 'filthy float' instead of intervention free "free float".Factors determining exchange rates are changes in exports and imports of goods and services, capital movements, banking and financial institutions,changes in both price level and interest rates, speculation, stock market behaviour,political and economic conditions and policies. 

Despite acknowledging  India as the fastest growing major (currently 5th largest) economy of the world, IMF report recently raised certain questions regarding the resilience  of  our exchange rate mechanism and Debt GDP ratio. As per  IMF report of Indian economy in accordance with Article IV, country's current and medium term economic policies and outlook were reviewed and it concluded that foreign exchange market intervention by RBI  exceeded the levels necessary.Consequenly   IMF has reclassified India's defective exchange rate regime to "stabilised arrangement " from floating from December 2022 to October 2023.RBI on the other hand claimed that foreign exchange market intervention was in tune with the best practices of transparency and market determined. However RBI viewed that IMF  staff assessment about exchange management in India was for  a short period analysis restricted to last only months. While IMF highlighted it's concern foreign exchange intervention  (FXI) impacting the rupees  - US  dollar exchange rate RBI strongly disagreed asserting that RBI intervention was indispensable to control high volatility. 

On the fiscal front regarding the debt GDP ratio IMF noted that given the shocks particularly climate change risks that have to face the Debt GDP ratio could exceed 100% in the medium term by 2028.Long term risks are high because considerable investment is required to reach India's climate change mitigation targets and improve resilience to climate stresses and natural disasters This suggests that new and preferably concessional sources of financing are needed along with private sector investments and carbon pricing or equivalent mechanism .Indian authorities particularly the Finance Ministry and RBI rejected IMF's projections terming it as a worst case scenario with very remote possibility. For instance despite the multiple shocks faced in the past two decades India's public Debt GDP ratio at the general government level (inclusive of both  central and state public debts) has barely increased from 81% in 2005-06 to 84% in 2020- 21 and further declined to same 81% in 2022-23. This is higher than the prescribed level of general public debt GDP ratio of 60 % comprising of  40% at the Central level and 20% at the state level. It is heartening to note that our debt is mostly internal in  rupees and comprise of largely long-term debt. Whereas in the global level public debt witnessed four fold increase as against three fold increase in GDP between between 2000 and 2022.Rapid increase in developing countries' public debt is attributed to development financing, cost of living crisis and climate change. The number of  indebted countries swelled from 22 in 2011 to 59 in 2022.

The IMF's observations on both exchange rate and public debt management can be considered as a serious warnings because despite the tag of fastest growing major economy of the world our sovereign investment ratings remained minimum, unchanged and at  lowest level of "BBB- Stable Outlook " since August 2006 .This can be attributed to  low percapita income,weak fiscal performance and cumbersome debt process.Despite higher capital expenditure especially on infrastructure investments,high GDP growth and tax buoyancy possibility of fiscal slippage in 2024-25 can be expected because of higher subsidies on fertilizers, social welfare schemes, employment guarantee schemes and expenditures related to General elections public borrowings and debt servicing costs Hence we should be more prudent in controlling and managing a resilient public debt program / plan with prudent investments and returns. Regarding foreign exchange management we can be more prudent by minimising the RBI's foreign exchange market intervention unless it calls for intervention  should be restricted to only in times of high volatility in exchange rate. Currently  India is relatively strong in the external sector due to buffer foreign exchange reserves(US $623.20 billion 22 month high as on December 29 2023) Inflows of both foreign remittances in which India ranked first and foreign investment flows that remained resilient . The Current Account Deficit also declined favourably from  3.8% of GDP in July-September 2022-23 to just 1% in the same period in 2023 -24. Current Account deficit refers to the difference between value of goods and services exported and transfer payment made and value of goods and services imported and tranfer payments made. In this relatively resilient Indian scenario IMF equating the currency depreciation experience of other developing countries's against US dollar  with that of India is unwarranted. However call for prudent  public debt management and effective measures towards fiscal sustainability and resilience are welcome. in any case  india's sovereign debt reaching 100% of GDP in the existing conditions is also a remote possibility.