In News:

The International Monetary Fund (IMF) has reclassified India’s de facto exchange rate regime from a “stabilised arrangement” to a “crawl-like arrangement”, reflecting the actual behaviour of the Indian rupee in the foreign exchange market rather than India’s official policy description.

What Has Changed?

• Earlier, India’s exchange rate was classified as stabilised, implying limited movement around a reference rate.
• The IMF now categorises it as crawl-like, meaning:
  • The exchange rate remains within a ±2% band around a trend for at least six months.
  • The currency is not fully market-determined, even though there is no formally announced crawl.

India’s Existing Exchange Rate Framework

• India officially follows a managed float system:
  • The Reserve Bank of India (RBI) allows market forces to determine the broad trend of the rupee.
  • RBI intervenes selectively to curb excessive volatility, maintain financial stability, and manage external sector risks.
• This differs from:
  • Floating exchange rate: Fully market-determined with minimal intervention.
  • Fixed exchange rate: Officially pegged and defended by the government/central bank.

Crawl-like Arrangement vs Crawling Peg

• Crawling Peg:
  • Involves pre-announced, periodic adjustments in the exchange rate.
  • Adjustments are often linked to indicators like inflation differentials.
• Crawl-like Arrangement (IMF classification):
  • Based on observed currency behaviour, not on a declared policy.
  • Indicates gradual and controlled movement of the currency, even without formal commitments.

How Does the IMF Classify Exchange Rate Regimes?

• Based on:
  • IMF Articles of Agreement (foundational charter adopted in 1944 at the UN Monetary and Financial Conference).
  • Article IV surveillance, under which IMF assesses:
    • Actual exchange rate movements
    • Scale and pattern of central bank intervention
    • Degree of policy commitment to any exchange rate path
• The methodology is uniform across countries and focuses on de facto practices rather than de jure claims.