Rupee as a Shock Absorber: What the IMF’s Oil-Price Advice Means for India
Key points An IMF official said India should allow the rupee to move in response to the current oil shock. A flexible exchange rate can help an economy adjust, but depreciation makes dollar-priced imports costlier in rupees. The RBI has used interventions to reduce disorderly currency movements; the IMF questioned their lasting effect against this shock. An IMF official said on October 21 that India should let the dollar–rupee exchange rate move as a first response to the current oil-price shock. The advice may sound counterintuitive when a weaker rupee makes imported fuel more expensive. It reflects a trade-off: trying to hold a currency at a chosen level can consume reserves and postpone the adjustment that higher import costs require. Krishna Srinivasan, director of the IMF's Asia and Pacific Department, gave the advice at a briefing in Mumbai, Reuters reported. His statement was an IMF official's policy recommendation, not an announcement of a change in Reserve Bank ...