Let exchange rate act as shock absorber: IMF on Fed hike impact on India | Economy & Policy News

The International Monetary Fund has said the US Federal Reserve’s decision to hike interest rates would contribute to tighter global financial conditions and suggested that India allow the exchange rate to act as a shock absorber.

An IMF spokesperson on Friday said rate hikes by the Federal Reserve have historically created some pressure for emerging markets through capital flows, financing conditions, and exchange rate movements.

On September 17, the Federal Reserve raised interest rates for the first time since July 2023 and indicated another hike could follow, as part of its effort to combat inflation.

The spokesperson said that, as with other countries, the impact on India would depend on the magnitude, pace, and persistence of the tightening cycle, as well as domestic economic conditions.

“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 IMF spokesperson said.

“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.