IMF Recommends India Use Exchange Rate as Shock Absorber for Fed Hike Impact

The International Monetary Fund (IMF) has advised India to let its exchange rate serve as a shock absorber in response to the US Federal Reserve's recent interest rate hike. The IMF noted that such rate increases by the Fed historically put pressure on emerging markets through capital flows, financing conditions, and exchange rate fluctuations.

The Federal Reserve raised interest rates on September 17 for the first time since July 2023, signaling the possibility of another hike to tackle inflation. An IMF spokesperson stated that the impact on India would depend on the scale, speed, and duration of the Fed's tightening cycle, as well as India's domestic economic conditions.

The spokesperson highlighted that India is entering this period from a strong position, citing robust growth, a reliable inflation-targeting framework, substantial external buffers, and stable corporate and financial sector balance sheets. These factors enhance the economy's resilience.

In light of this, the IMF recommended that India maintain a focus on domestic price stability through monetary policy while allowing the exchange rate to mitigate external shocks.