Fed rate hike impact: IMF tells India to let exchange rate act as shock absorber

The International Monetary Fund (IMF) has advised India to allow its exchange rate to absorb some of the impact of tighter global financial conditions following the US Federal Reserve's interest-rate hike.

An IMF spokesperson said on Friday that Fed rate hikes have historically put pressure on emerging markets through capital flows, financing conditions, and exchange-rate movements.

The impact on India would depend on the "magnitude, pace, and persistence" of the Fed's tightening cycle, as well as domestic economic conditions, the spokesperson said.

The Federal Reserve raised interest rates on September 17 for the first time since July 2023. It also indicated that another hike could follow as it works to bring down inflation.

The IMF said India was entering the period from a position of strength.

"However, India enters this period from a position of strength. Strong growth momentum, a credible inflation-targeting framework, ample external buffers, and healthy corporate and financial sector balance sheets have strengthened the economy's resilience," the spokesperson said.

The IMF said these factors would help India withstand the effects of tighter global financial conditions.

Against this backdrop, the IMF said India should allow the exchange rate to respond to external pressures while keeping monetary policy focused on domestic inflation.

"In this context, allowing the exchange rate to act as a shock absorber, while keeping monetary policy focused on domestic price stability, remains an effective approach," the spokesperson said.

(With inputs from PTI)