India Introduced Greater Exchange Rate Flexibility Without Hiccups: IMF

Washington, Sept 28 | Updated: Sep 29 2004, 05:32am hrs
The International Monetary Fund (IMF) has given India the thumbs-up for its gradual introduction of greater exchange rate flexibility without hiccups even when reforms to policy frameworks were in progress.

India carried out the transition from the peg of the rupee to the dollar in March 1993 and shifted to greater exchange rate flexibility when reforms to policy frameworks were still in progress, the IMF said in this years World Economic Outlook. The country also maintained the managed float without major distress even during times of international market turbulence, IMF said.

After abolishing the peg of the rupee, the Reserve Bank of India (RBI) had actively intervened in the foreign exchange market to reduce volatility. The exchange rate against the dollar rem-ained quite stable until the end of the 1990s with occasional shifts at times of large unfavourable shocks.

In the past several years, the IMF said, the RBI has allowed even greater exchange rate flexibility, but still maintained many controls on residents capital account transactions. Giving the background, IMF said financial sector reforms were an important component of Indias economic liberalisation programme that started in 1991. These reforms were implemented gradually, beginning with interest liberalisation, introduction of greater competition in the banking system, measures to develop domestic securities markets and steps to strengthen financial sector supervision, IMF said.

In the period after the floating of the rupee, many of the reforms launched in the early 1990s continued to be implemented and enhanced.

Moreover, foreign exchange dealers were allowed to use derivatives to hedge their positions and the prudential requirements, regarding the risks of foreign exchange exposures were tightened. External financial liberalisation was also gradual and focused on long-term foreign direct investment and equity portfolio inflows.

Extensive controls on short-term borrowing were retained throughout the 1990s which, together with the existing prudential norms, limited foreign exchange vulnerabilities in the banking and corporate sectors and increased Indias resilience during international financial crises, IMF noted.

The policy of maintaining limited external public debt on concessional terms also diminished the exposure of the economy to exchange rate volatility.

Monetary policy in India, it said, has traditionally focused on the twin objectives of maintaining price stability and supporting growth.