IMF Flags Rupee Regime as ‘Crawl-Like Peg’ as RBI Steps Up Intervention

India’s exchange-rate framework is back under scrutiny after the International Monetary Fund described the rupee’s regime as a crawl-like peg, sharpening its assessment of how actively the Reserve Bank of India has been managing the currency. The reclassification comes at a time when the rupee has slipped to record lows, adding to concerns about how tightly India is holding the exchange rate.

Veteran forex trader Venkat Thiagarajan, who has spent more than three decades tracking the currency, says the IMF’s tag reflects the sheer scale of intervention, which he believes now shapes the rupee’s daily range more than macro fundamentals. According to him, the pattern increasingly resembles a “caged” exchange-rate system rather than a flexible float.

The shift carries implications beyond market mechanics. Exporters and importers have been working with thin margins and limited visibility, and many now say they cannot rely on macro signals alone because they expect the central bank to defend specific levels. When those levels break, volatility spikes and uncertainty rises.

Foreign investors, too, are recalibrating. Equity, debt and even FDI flows have softened since India was classified under a stabilised arrangement earlier this year, and Thiagarajan notes that assumptions of a 4% annual rupee depreciation plus hedging costs have dulled dollar-adjusted returns. The IMF’s latest observation is likely to amplify questions over transparency and the consistency of India’s inflation-targeting framework.

At the core of the debate are credibility and confidence—factors that Thiagarajan argues determine the currency’s long-term path as much as flows do. The divergence between stated policy and market practice, he says, has widened, and the rupee’s trading band has been inching higher in a way that reinforces expectations of a gradual depreciation bias.

Watch the interview here. 

Edited excerpts:

Q: The IMF has reclassified India’s exchange-rate regime as a crawl-like peg. What exactly did the Fund say, and what does it imply for the rupee?
A: The IMF assessed India’s regime based on actual market behaviour. Although India has described its system as a floating regime since 1994, the Fund looks at how often and how heavily the central bank intervenes. Between 2022 and 2024, the pattern shifted from a floating regime to what the IMF called a stabilised arrangement. The latest reading moves this to a crawl-like peg. It is not an upgrade or downgrade, just an observation based on intervention intensity.

Q: How does RBI’s intervention pattern influence this classification?
A: The scale is significant. From January to December 2024, RBI bought roughly $24 billion a month and sold about $25 billion. In a single month, purchases were near $69 billion and sales around $49 billion. When the central bank accounts for more than a quarter of market volumes, the IMF interprets it as active management rather than a free float.

Q: Does this intervention help the broader economy?
A: It has not materially improved exports or reduced imports. The October trade deficit was $41.7 billion, with gold imports at $14 billion. Holding the exchange rate in a narrow band encourages inefficient capital allocation and weakens the price signals needed for efficient hedging and investment decisions.

Q: You argue that this complicates India’s inflation-targeting framework. Why?
A: Inflation targeting requires an independent central bank, monetary policy independence and a flexible exchange rate. A tightly-managed currency conflicts with that structure. If the exchange rate is constrained, the policy rate cannot transmit macroeconomic signals as effectively.

Q: Exporters say the lack of clarity is increasing uncertainty. What are they experiencing?
A: Exporters and importers work with thin margins. They assume RBI will defend certain levels—like 88.80 recently. When that level broke, volatility rose and sentiment weakened. A simple statement such as “we are watching the market” would give businesses visibility and restore confidence.

Q: Where is the rupee headed? Is 90 likely?
A: Forecasting is difficult when macro forces are not allowed full play. The trading band has shifted upward through the year, suggesting a depreciating bias. If that continues, the rupee could move into the early 90s within four to six weeks. But if RBI steps back and allows the dollar cycle and domestic factors to operate, the rupee could strengthen. The key is credibility.

Q: Does the IMF’s tag affect that credibility?
A: It can. Investors prefer markets with floating regimes because they get visibility. After India was tagged as stabilised earlier this year, flows into equity, debt and FDI slowed. This may be coincidental, but the new classification does not help sentiment.

Q: How do foreign investors view dollar returns in this environment?
A: For fixed income, a foreign investor borrowing around 5% in dollars and hedging at about 2.2% faces a landed cost of around 7.25%. A 10-year Indian government bond yields about 6.5%, so the economics do not work. On equities, unless returns exceed 20%, the combination of depreciation and hedging costs makes the investment less attractive.

Q: If you were shaping policy, what would you do now?
A: I would allow the exchange rate to move more freely. India is a strong economy growing at 7–8%. There is no foreign-exchange crisis risk. Releasing the currency from this tight band would restore confidence and attract capital. Investors look for both returns and currency gains. A freer rupee would reinforce India’s credibility as a flexible regime.