IMF advises India to use exchange rate as Fed hike buffer

The International Monetary Fund (IMF) has advised India to let its exchange rate act as a shock absorber in response to the US Federal Reserve's recent interest rate hike. The IMF noted that such rate hikes historically create 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, signaling the possibility of another hike to combat inflation. An IMF spokesperson explained that the impact on India would depend on the magnitude, pace, and persistence of the tightening cycle, as well as domestic economic conditions.

The spokesperson highlighted India's strong economic position, citing robust growth momentum, a credible inflation-targeting framework, ample external buffers, and healthy corporate and financial sector balance sheets. These factors, the spokesperson said, have strengthened the country's resilience.

In this context, the IMF recommended that India allow its exchange rate to absorb shocks while maintaining a monetary policy focused on domestic price stability.