Washington: The International Monetary Fund has said the rupee should be India’s “first line of defense” against the energy shock from the war in the Middle East, signalling a preference for exchange rate flexibility over heavy central bank intervention, even as it kept its 7 per cent growth forecast for the Indian economy.
Responding to a question at her regular press briefing in Washington on Thursday about the Reserve Bank of India’s recent intervention to support the rupee, IMF Communications Director Julie Kozack said she was echoing the head of the Fund’s Asia and Pacific Department, Krishna Srinivasan.
“Given the ongoing energy shocks that India is confronting, like all countries, our view is that the rupee should be the first line of defense in the face of these shocks,” Kozack said.
“So, allowing the exchange rate to move freely to reflect the impact of these shocks is important to help the Indian economy adjust to these shocks,” she said.
Kozack said the Fund’s advice would change if a weaker currency started to push up prices across the economy.
“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,” she said.
She did not rule out intervention altogether. “And more generally, foreign exchange intervention can be appropriate when market conditions become disorderly,” Kozack said, adding that this 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,” she said.
On growth, Kozack described India as “really an engine of growth in the world economy.”
“We do project growth in India at 7 percent both for FY 2026-2027 and FY 2027-2028,” she said, citing robust domestic demand and strong services activity. “So, India right now has quite a lot of growth momentum,” she added.
She flagged the weather as the main downside risk. Worse-than-expected weather, “including because of an El Niño, could lower crop yields in India, and it could kind of weigh on activity, particularly in rural areas,” Kozack said, adding that it could also lead to higher food price inflation and hurt household purchasing power.
“Right now those risks have not materialized,” she said. The Fund will next reassess its India projections in its January World Economic Outlook update.
Kozack also said financial conditions for emerging economies remained broadly supportive despite higher bond yields. “Spreads in emerging and developing countries are still quite compressed,” she said, attributing it to years of work by those countries to strengthen their fundamentals.
On the United States, she said the Federal Reserve under Chairman Kevin Warsh was “appropriately remaining data-dependent” after holding rates on Wednesday following a hike in September, and that headline US inflation remained above the Fed’s 2 per cent target, partly because of the energy price shock from the Middle East war.
Asked about the US Treasury’s October 14 statement calling on the Fund to sharpen its work on global imbalances and debt sustainability, Kozack said the United States was the IMF’s largest shareholder and that “we do value the voice and engagement of the United States.” She referred questions on the meaning of the statement to the Treasury.
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