IMF’s Article 4 consultation report on India
The Indian government has expressed its disagreement with the IMF staff’s ‘baseline’ assumption that the 50 per cent US tariffs on its goods exports ‘would remain in place indefinitely’, based on which the staff pegged the country’s GDP growth at 6.6 per cent this year, and pared its 2026-27 projection by 20 basis points to 6.2 per cent.
It linked the growth drag next year to the “high US tariffs — assumed to persist under the baseline, dent external demand and investment.”
While Indian authorities agreed that the overall economic impact of the tariff shock “should be manageable in the near term, although a few industries would be heavily affected”.
However, the authorities did not concur with the US tariff scenario the IMF staff painted and “considered staff’s estimated growth impact to be on the high side given frontloading and the potential for developing other export markets”.
The IMF identified further escalation of trade tensions and deepening geoeconomic fragmentation as a significant near term risk for India which could lead to tighter financial conditions, higher input costs, and lower trade, FDI, and economic growth.
“If tariffs persist at current levels, there would likely be scope for further monetary easing amid benign inflation dynamics,” it observed.
The Indian authorities acknowledged the elevated global uncertainty and potential further external shocks, but stressed that there was an “upside potential from newly concluded and forthcoming FTAs (free trade agreements)”.
The authorities also felt that staff’s potential growth estimate was on the conservative side.
The IMF staff called for “targeted, transparent, and time-bound support” to industries heavily affected by tariffs, noting it is warranted to mitigate the distributional impact of the tariffs.
“Pausing fiscal consolidation in FY27 — implying a neutral fiscal stance — would be appropriate if the tariffs persist,” they argued, citing “an output gap expected to open” next year under the baseline and high external uncertainty.
“That said, if a tariff reduction avoids an output gap, fiscal consolidation should continue next year,” the IMF staff recommended.
Indian authorities have conveyed that it would be “premature to consider a pause” in fiscal consolidation in FY27, especially in the context of the credible and transparent fiscal guidance path that the Indian government has been following.
IMF also noted that if tariffs persist, there is room for lowering the monetary policy rate modestly owing to an expected emergence of a negative output gap amid benign inflation dynamics.
“That said, a swift reversal of the tariffs would limit the need for further monetary easing,” the review noted.
The IMF staff also added a caveat for the RBI about the one-off direct impact on inflation from the GST reform, suggesting the central bank “should look through” it.
IMF reclassifies India’s FX regime as ‘floating’ after yr of stability tag
The International Monetary Fund (IMF) has reassigned the ‘floating’ label for the Rupee’s exchange rate arrangement, citing declining forex interventions by the central bank in recent times.
In 2023, the Fund had dropped the floating tag and termed India’s de facto exchange rate policy a ‘stabilised arrangement’, indicating the central bank was intervening too much and too often in the foreign exchange market.
“The exchange rate of the rupee is determined in the interbank market, where the Reserve Bank of India (RBI) intervenes frequently.
"The RBI’s stated intervention objective is to curb excessive volatility.
"India’s de jure exchange rate arrangement is floating, and its de facto exchange rate arrangement is classified as a crawl-like arrangement,” the IMF staff 2025 report on India presented to its board noted.
According to the IMF, a crawl-like arrangement refers to small, gradual adjustments to a currency to reflect inflation gaps between a country and its trading partners.
As opposed to this, a ‘stabilised arrangement’ refers to a system where a currency's spot market rate is kept within a narrow band for an extended period, typically six months or more, through central bank intervention.
The IMF staff report said the period considered for a potential reclassification of the de facto arrangement is any six-month span beginning from the onset of a new trend, as observed since the arrangement was last classified.
Observing that India’s external trade and FX [foreign exchange] policies have been more aligned with IMF staff’s advice than in the recent past, the report, however, noted that “significant (though generally declining) FXI [FX intervention] has continued in periods not marked by destabilising risk premia, potentially impeding the exchange rate’s role as an absorber of external shocks”.
Mooting greater exchange rate flexibility, the IMF said: “While the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility, with interventions limited to periods of destabilizing risk premia, considering India’s relatively low FX mismatch, well-anchored inflation expectations, and generally deep FX market.”
The Indian authorities have maintained that the Rupee and US dollar exchange rate has been market determined without the targeting of any particular level.
“They (Indian authorities) felt that exchange rate movements largely reflected India’s favorable fundamentals, with interventions, if and when undertaken, aimed at containing excessive volatility,” the staff report noted.
In a statement to the IMF staff authored by officials, led by India’s executive director on the IMF board Urjit Patel, it was submitted that the RBI’s exchange rate policy has remained consistent over the years, and is focused on maintaining orderliness and stability, without compromising market efficiency.
“Accordingly, FX interventions, if and when undertaken, aim at smoothening excessive volatility rather than targeting any specific exchange rate level or band.
"The exchange rate is largely determined by market forces.
"As in the past, exchange rate flexibility continues to be the first line of defense in absorbing external shocks,” the statement emphasised.
Flags LRS curbs
The IMF staff report also signaled that some of the restrictions imposed by Indian authorities on current international transactions, including the tax collected at source (TCS) on outflows under the Liberalised Remittances Scheme (LRS), required the approval of the Fund’s executive board under obligations India has accepted in 1994.
It highlighted the exchange restrictions arising from the TCS for personal remittances and payments for educational, medical, and travel services under the LRS.
In 2023, the government had raised the TCS on outward remittances under the LRS from 5 per cent to 20 per cent to track high-value transactions and deter large capital outflows.
Other restrictions included a 5 percent tax on payments above the annual Rs 1 million threshold for medical services and education (excluding education payments financed by loan), and a 5 per cent tax on payments for travel services (overseas packages) below the annual threshold of Rs 1 million, and 20 percent tax thereafter, to the extent that it applies to cross-border payments to a non-resident seller.
“The Executive Board has not approved these restrictions,” the staff report underlined.
Other restrictions it flagged related to the non-transferability of balances under the India-Russia debt agreement, restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries and a restriction on the transfer of amortization payments on loans by non-resident relative.
Structural reforms critical
Underlining the importance of structural reforms to support India’s ambition of becoming an advanced economy, the IMF said there was a need to safeguard economic stability and activate all engines of growth including labour, capital, and productivity.
“India needs to boost all growth engines to become a more open, dynamic, and innovative economy with better factor allocation across sectors and firms,” the IMF report said.
In the short term, the IMF said that India can implement reforms to remove trade restrictions, implement the new labour codes, and continue the public investment push among others.
In the medium term however, deeper reforms will be needed in agriculture, land, and the judicial system, along with efforts to strengthen education, skills development, health, access to credit, and social safety nets, IMF said.
The IMF warned that a sharp decline in household confidence, potentially induced by heightened uncertainty, weakening stock market performance, or tightening of bank lending standards, could weigh on private consumption.
Stressing that sustaining high potential growth and sufficient job creation requires strong structural reforms, the IMF said, “Priorities include high and efficient public investment, labor market flexibility, streamlined regulations, and trade and investment liberalization to boost competitiveness and attract FDI.”
The report, while noting recent labour market and goods and service tax (GST) reforms, said that significant challenges remain for India including relatively low per capita income, elevated public debt.
It said that the handover from public to private investment as a growth engine remains to be achieved and that high-quality employment benefits only a small group of India’s growing labor force.