Chennai: Weather events, including Super El Nino, remain an important downside risk for India’s growth, which IMF had projected earlier to be 7% in FY27 and FY28, finds IMF. On RBI’s efforts to defend rupee, IMF said that the exchange rate should be allowed to move freely to reflect the impact of energy shocks.
“Weather events remain an important downside risk for India, like for many countries that are exposed, particularly to the super El Niño. So 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,” said IMF.
It could also lead to increased food price inflation, and that can affect the ability and purchasing power of households.
“So, these are risks that India faces, but right now those risks have not materialized. So, we see it really as a risk going forward. And of course, depending on whether that risk materializes, we will reassess our growth projections for India in our January WEO update,” it said.
On RBI’S move to prop up the rupee-dollar exchange rates, IMF said: “given the ongoing energy shocks that India is confronting, like all countries, 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 these shocks. If significant rupee depreciation leads to broad-based increases in inflation, then IMF’s advice would be that monetary policy tightening could be considered to preserve price stability. So that’s when the depreciation starts to feed into inflation.
Generally, foreign exchange intervention can be appropriate when market conditions become disorderly. And that is in a way consistent with the IMF’s Integrated Policy Framework. But in the case of India, IMF’s view is that exchange rate flexibility remains the preferable policy response.
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