IMF Advises India to Let Exchange Rate Absorb Fed Hike Impact

The International Monetary Fund (IMF) has advised India to let exchange rates absorb the impact of the US Federal Reserve's interest rate hike.

The IMF spokesperson noted that Fed rate hikes have historically put pressure on emerging markets through capital flows, financing conditions, and exchange rate movements.

On September 17, the Federal Reserve raised interest rates for the first time since July 2023 and hinted at another potential increase to combat inflation.

The impact of the rate hike on India would depend on several factors, including the magnitude, pace, and persistence of the tightening cycle, as well as domestic economic conditions.

However, India has a strong growth momentum, a credible inflation-targeting framework, ample external buffers, and healthy corporate and financial sector balance sheets, making it more resilient to potential shocks.

The IMF spokesperson suggested that allowing exchange rates to act as shock absorbers while keeping monetary policy focused on domestic price stability remains an effective approach for India.