IMF: India Need Emergency Plans For Potential Rupee Meltdowns

India should prepare a plan to respond to volatility in global currency markets that may come as the U.S. Federal Reserve reduces monetary stimulus, the International Monetary Fund staff said in a report.

While India’s finances have improved since last year, a coordinated plan is needed in case capital account pressures re-emerge, the IMF said. Any plan should make rupee flexibility the key defense and include measures to raise the benchmark interest rate, impose cash curbs, open foreign-exchange swap windows and raise diesel prices, it said in an annual review of India’s economy.

“The principal risk facing India is the inward spillover from a tightening of global liquidity interacting with domestic vulnerabilities,” the IMF said in the statement. Pressures associated with India’s “still-significant external financing need” could lead to higher borrowing costs, fund outflows and “disorderly adjustments” in the exchange rate, it said.

India has reduced its current-account deficit, increased interest rates and built up foreign-exchange reserves after the rupee plunged last year on news the Fed would curtail its $85 billion in monthly bond purchases. The rupee has gained about 11 percent since hitting a record low last August, the best performance among major emerging-market currencies.

Bloomberg

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Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu