Rupee Weakness and IMF’s Crawl-Like Arrangement

Context

The IMF has reclassified India’s exchange rate regime from a ‘stabilised arrangement’ to a ‘crawl–like arrangement’, signalling more flexibility in rupee movement. The Finance Ministry clarified that the rupee’s gradual weakening is in line with other emerging market (EM) currencies, not due to domestic instability. Meanwhile, the inflation outlook is improving, giving room for possible rate cuts.

What is the Issue?

1. The Indian Rupee traded between ₹87.8 – ₹88.8 per US dollar in October, very similar to September levels, showing low volatility.
2. However, over a longer period (March-October 2025), the rupee depreciated by 3.5%.
3. Recently the rupee crossed ₹89 per dollar, its lowest value ever, due to global factors and reduced RBI intervention.

What is a Crawl-Like Exchange Rate Arrangement?

Why is it important?

1. Indicates greater market-driven pricing and higher exchange rate flexibility.
2. Helps countries absorb global shocks better without exhausting forex reserves.

Why Did the IMF Change India’s Status?

1. Reduced RBI intervention in forex markets:
   1. $400 billion sold in 2024-25 to defend the rupee.
   2. Only $44.3 billion sold in the first half of 2025-26.
2. Rupee now shows more two-way movement, not artificially defended.
3. India’s macro position is strong enough to allow market forces to play a bigger role.

Why is the Rupee Weakening?

1. Stronger US Dollar globally: Higher US interest rates attract investment to America, making the dollar appreciate and EM currencies weaken.
2. Global trade tensions & 50% US tariffs: Tariffs discourage exports and weaken investor confidence, leading to capital outflows.
3. Foreign investors reducing exposure to emerging markets: Due to geopolitical risks, FIIs have pulled money out, increasing dollar demand.
4. Reduced RBI support: RBI is not aggressively selling dollars anymore; without support, the rupee naturally adjusts to market forces.
5. Risk-averse global financial environment: Conflicts, inflation worries, and economic uncertainty push investors toward safe assets such as the dollar.

RBI’s Position

1. RBI does not target a fixed rupee level.
2. It only intervenes to prevent excessive volatility, not to maintain a specific rate.
3. Strategy ensures stability without exhausting forex reserves unnecessarily.

Inflation Outlook

1. Inflation outlook is positive due to:
   1. Lower global commodity prices
   2. Stable energy markets
   3. Domestic supply-side interventions
2. Retail inflation dropped to 25% in October (record low).
3. Inflation expected to average below 2% in 2025-26, much lower than the 4% target.
4. Repo rate cuts likely – MPC may reduce rates further after cutting 100 bps already this year to 5.5%.

Implications

1. A weaker rupee improves export competitiveness because Indian goods become cheaper for foreign buyers.
2. This can help sectors like textiles, IT services, and pharmaceuticals increase sales in global markets.
3. However, the cost of imports becomes higher, especially for items like crude oil, electronic components, fertilizers, and edible oils.
4. Since India imports a large share of these goods, a weaker rupee can increase the import bill and put pressure on domestic prices if the trend continues.
5. Low inflation combined with expectations of interest rate cuts can stimulate economic growth.
6. When inflation is under control, the RBI may reduce the repo rate, making loans cheaper. This encourages more investment and borrowing by businesses and households.
7. Allowing the rupee to move more freely based on market conditions strengthens investor confidence. It shows that India is not artificially controlling the exchange rate and has strong financial fundamentals.
8. This transparency improves the credibility of the economy and can attract long-term foreign investment.

Challenges and Way Forward

Conclusion

The rupee’s depreciation is moderate, gradual, and consistent with emerging market trends, not a sign of crisis. The shift to a crawl-like regime reflects greater confidence in India’s economy and reduces dependence on artificial RBI defence. With strong inflation control and potential rate cuts, India remains well-positioned, though continued caution against global instability is necessary.