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India a notch away from free float: IMF

Subhomoy Bhattacharjee

The International Monetary Fund has placed India one notch below the most advanced countries like the US, the UK and Switzerland on capital account convertibility.

The ranking of the member-countries by the IMF is based on an eight-point classification of their exchange rate regimes.

While the IMF makes no value judgment about the gradation, it shows how far each country has travelled towards floating exchange rates.

The grading finds mention in the latest edition of the "International Financial Statistics", published annually by the IMF. It says India is among 43-odd countries whose currencies are in managed float with no pre-announced path for the exchange rate.

Monetary authorities influence the movement of exchange rates through intervention in forex markets without specifying the path a rate should take.

The list includes Thailand and Russia, among others. But while these countries have an explicit yardstick to gauge the movement of their currencies, like inflation rates or an internal value of the currency, India has no such yardstick, the IMF report says.

The final step is to have an independently floating exchange rate where the monetary authority intervenes only to control violent currency fluctuations, it adds.

Apart from the US and the UK, Switzerland and Japan have floating exchange rates.

Government officials say the distinction has got blurred. This is because it has been announced in the budget that the external debt portfolio will be measured in accordance with international norms. Also, investment in overseas securities by domestic mutual funds has been sanctioned.

They also said this was one of the main reasons why the country was building up substantial forex reserves. The government is likely to maintain forex reserves to foot a 12-month import bill before allowing repatriation of profits from India.

In the IMF list, the countries that have no separate legal tender figure at the bottom. To this list belongs 40 countries, including several African countries. The countries having a currency board arrangement are placed on the next rung. Above them come countries like China and Bangladesh, which have "fixed-peg arrangements".

The next stage of pegged exchange rates within horizontal bands was the official Indian position for most of the past 50 years.

The rupee was linked to a basket of six currencies whose composition and weight varied.

But with liberalisation, India started moving towards capital account convertibility by reducing or eliminating the restrictions on the use of foreign exchange and integrating the domestic markets with the international markets.

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