The IMF has said that India’s official foreign exchange reserves are sufficient for precautionary purposes and has suggested that the accumulation of additional reserves is less warranted. The recommendation in the External Sector Report 2022 comes at a time when the Indian rupee, as well as several emerging market currencies, are under pressure. The policy prescription is broadly in line with the stated position of the RBI. The central bank dipped into the foreign exchange reserve to avoid a sharp depreciation, in a context of repeated rate hikes in developed countries, particularly in the United States, and uncertainty caused by geopolitical tensions.
The IMF has estimated that high commodity prices and the war in Ukraine will widen India’s current account deficit (CAD) to 3.1% of GDP in 2022, from 1.2% last year, but maintained that the assessment of the country’s external sector, based on several parameters, remained broadly in line with its fundamentals. The multilateral agency also said the BODY is broadly consistent with India’s per capita income level, favorable growth prospects, demographic trends and development needs and suggests that it would stabilize in the medium term.
“India’s external debt liabilities are moderate compared to its peers, and short-term refinancing risks are limited. The moderate level of external liabilities reflects a gradual approach to capital account liberalisation, which has mainly focused on attracting FDI,” he said.
As part of the policy prescriptions, he suggested a gradual withdrawal of fiscal and monetary stimulus measures, which have already been launched and are pushing exports. He suggested that the government negotiate free trade agreements with major trading partners to boost exports, further liberalize the investment regime and reduce import duties. “Structural reforms could deepen integration into global value chains and attract FDI, thereby reducing external vulnerabilities,” the IMF said.