Shaktikanta Das: India's relations with the International Monetary
Fund
Remarks by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Release of Shri
V. Srinivas's book on "India's Relations with the International Monetary Fund: 25 Years in
Perspective 1991-2016", New Delhi, 26 July 2019.
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I am delighted to be part of this event for the launch of Shri V. Srinivas's book on "India's
Relations with the International Monetary Fund". A respected civil servant of the 1989 batch, he
has drawn extensively on his hands-on stint as Advisor to the Executive Director for India at the
IMF during 2003-06, combining it with his scholarship and experience in policy making. The book
and the function today will promote readership on an important subject and spur more thoughts
and analysis. As you are aware, RBI as an institution is closely involved with the functioning of
the IMF both to project our Macro economic interests as well as from the angle of governance of
the IMF.
2. Against the backdrop of previous Fund programs with India in 1966 and 1981, the book trains
its focus on perhaps the most eventful period of India's engagement with the Fund, beginning
with the balance of payments crisis of 1991 and covering the period up to 2016 that brings to the
fore the dramatic transition in India's status with the IMF from a debtor to a creditor. In the same
period, the Indian economy also witnessed a transformation from an inward-looking economy
driven by import substitution to an increasingly open and emerging global power in a dynamic
world order. This period also witnessed the transformation of the Fund from a stigmatised lender
of last resort focused exclusively on exchange rate surveillance towards a more central role in
the international monetary system after the global financial crisis. Over this period, the Fund has
not only focussed on macroeconomic policies but embraced a wider gamut of issues that
covered women's empowerment, poverty alleviation, sustainable development, fintech and
climate change. As Dr Y.V.Reddy has stated in his Foreword to the book : "The book fills a
serious gap in the existing literature on the subject....". I congratulate Srinivas for his scholarly
contribution in writing this book.
3. I thought I would take this opportunity to share some of my own thoughts on the Fund and its
role in the international monetary system, drawing on my experiences, including as G20 Sherpa
and now as Alternate to the Finance Minister in the Board of Governors of the Fund. Speaking on
the sidelines of the Fund-Bank spring meeting in April this year, I had alluded to labels such as
"currency manipulation" and called for greater understanding all around, to the compulsions of
Emerging Market Economies (EMEs) in building up their own buffers. I would like to point out that
the origin of the phrase 'currency manipulation' itself is of recent vintage, dating to 2015, when
the US Treasury started publishing a semi-annual report on the subject. In this backdrop, it has
acquired a predominantly bilateral connotation. Currently, the semi-annual Report judges
countries as currency manipulators on the basis of three criteria: (i) a bilateral trade surplus with
the US of at least US $ 20 billion; (ii) a material current account surplus of at least 2 per cent of
GDP; and (iii) persistent one-sided net purchases in 6 out of 12 months adding to at least 2 per
cent of an economy's GDP over a 12-month period. A country is put on the monitoring list even if
two out of the three criteria are met. India was recently removed from that list after featuring in it
from 2018. In the more recent period, the term has gained greater focus in the heat and dust of
trade wars.
4. A question that crops up is why has labelling become a bilateral prerogative when a multilateral
institutional architecture exists for the purpose? After all, Article IV, Section 3 (a) of the Articles of
Agreement that established the Fund, invests it with the oversight of the international monetary
system. Article IV, section 1(iii) enjoins each member country to avoid manipulating exchange
rates to gain unfair competitive advantage. Article VIII, Section 3 obligates members and their
fiscal agents not to engage in discriminatory currency arrangements or Multiple Currency
Practices (MCPs) unless they are approved by the Fund or maintained under Article XIV, Section
2.3. The application of the MCP concept has been reasonably considered, explained and applied
by the Fund with suitable changes carried out when needed.
5. After the collapse of the Bretton Woods system of fixed exchange rates and the eventual
floating of currencies from 1973, the second amendment of the Fund's Articles of Agreement in
1978 made its mandate more explicit by fixing its oversight over individual countries' exchange
rate policies. The Fund's mandate was updated in 2007 to clarify that exchange rate manipulation
was associated with 'fundamental misalignment' that results in external instability. Fears of
labelling among the membership led to several reviews culminating in 2012 when an Integrated
Surveillance Decision was adopted, which emphasised the connection between domestic and
external stability as well as global risks and spillovers.
6. In pursuit of this mandate, the Fund, in its Article IV Consultations every year, undertakes
indepth assessment of members' economic developments and policies, including and especially
exchange rate policies. This is backed by rigorous technical evaluation through a suite of models.
The Consultations report is published and any case of exchange rate misalignment and/or
multiple currency practices is candidly brought to the notice of national authorities for correction.
This is mandatory, as the Articles of Agreement constitute an international treaty; and in India,
they are underpinned by parliamentary legislation in the form of the International Monetary Fund
and Bank Act, 1945. Given this multilateral framework, the overlay of bilateral labelling that I talked
about earlier raises questions, including on the role of the Fund itself.
7. Admittedly, like any policy-making institution, the Fund's policies and practices will not always
be the right or the best in terms of their efficacy. As its own Independent Evaluation Office (IEO)
pointed out in 2005, a major reason for the Fund failing to meet its core responsibility of
exchange rate surveillance was a strong sense among some member countries of a lack of
even-handedness in surveillance - that somehow, it was tolerant of currency depreciations but
not of countries resisting appreciation. This criticism by the IEO persists in its Evaluation Update
of 2017. Notwithstanding such criticisms, the IMF is open to learning and deservedly remains a
well-respected institution. We, therefore, look forward to engaging with the Fund on its April 2019
proposal for a more integrated framework encompassing the interaction of monetary, exchange
rate, macro-prudential and capital flow management policies. I strongly believe that a multilateral
framework under the aegis of the IMF is the most appropriate approach to deal with these issues.
8. It is important to appreciate the context in which EMEs operate so as to foster a shared
understanding of their challenges. First, the nature of shocks which these countries face has
changed from balance of payments strains to full-blown financial crises. Second, in the years
following the global financial crisis, EMEs and financial markets have been buffeted by global
spillovers which have amplified both sudden surges and sudden stops or reversals of capital
flows. The existing state of financial safety nets, regional or multilateral, fall grossly short of
providing the necessary buffers against such turbulence. Moreover, access to swaps from
systemically important central banks is not available to the EMEs. For many EMEs, high
fluctuations in currency movements have pronounced macroeconomic consequences. This is
corroborated in a recently articulated view by Mark Carney, Governor, Bank of England that
significant improvements in the institutional frameworks of EMEs are being offset by
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asymmetries in the international monetary system and market-driven finance. Against this
backdrop, these countries have accumulated reserves over the past two decades which has
significantly reduced the sensitivity of capital flows to push factors. Governor Carney adds that
this extra insurance, however, has come at a high cost for EMEs. In this context, I may mention
that in spite of the insurance coming at a high cost, there is enough evidence to indicate that
costs of financial crises have been very high in relation to costs of insurance. Thus, it is evident
that build-up of reserves by EMEs, so far is not so much to prop up their currencies as to
selfinsure themselves against global contagion.
9. How do we collectively ensure that multilateral principles and frameworks for orderly exchange
rate and payment arrangements are not superseded by bilateral hegemony? The best way
forward is to strengthen existing institutions like the Fund and make them more relevant and
trusted. Through its Articles of Agreement, the Fund is a quota-based organisation, but quotas
currently constitute only 49 per cent of its resources. At the height of the global financial crisis
and in the years following it, the Fund activated borrowing arrangements such as the New
Arrangements to Borrow (NAB) and the bilateral Note Purchase Agreements (NPAs), to which
India also contributed. These borrowing arrangements are, however, intended to be temporary
bridges. The solution lies in commitments of quota resources by members in order to secure the
legitimacy of the Fund as a global lender of the last resort, the overseer of the international
monetary system and a trusted policy advisor. This adds urgency to the completion of the 15th
General Review of Quotas, delayed for the fourth year now.
10. The global order today faces several challenges that will test the skills of the international
organizations as well as those of national monetary and fiscal authorities. International
coordination has become somewhat weaker in the very recent years. Many advanced
economies (AEs) have been pursuing low interest rate policies for long without perhaps
adequate recognition of their adverse impacts. Today at the global level, the total amount of
bonds with negative yields has risen to nearly $13 trillion; implying that nearly a third of AE
government bonds trade at negative yields. Equity premium has crossed 4 per cent, which is 1
standard deviation higher than its long-term average. Return to lower interest rates in AEs poses
challenges as leverage has already built up in the EMEs and the needed deleveraging is not
complete in many European economies. Amid low global interest rates, total credit to the
nonfinancial sector in the EMEs went up from 107.2 per cent of GDP at the end of 2008 to 194. 4 per
cent of GDP by March 2018, before it dropped to 183.2 per cent at the end of 2018. Net private
capital flows to EMEs in the form of direct and portfolio investments also nearly doubled in the
post-crisis period. This has posed risks to some EMEs. Some of these risks have surfaced in
form of weak bank/ non-bank balance sheets and some remain latent and can surface,
especially when the global interest rate cycles turn decisively. The world will be looking to the IMF
to suggest dependable solutions. EMEs on their part need to follow policies that promote
macroeconomic and financial stability, while focussing on growth.
11. Solutions are turning more difficult to come by as the global economy seems to be moving
into a new and unsettling phase in an environment of stressed trade negotiations, rising
geopolitical confrontation, and limited policy space and high debt levels in several economies.
General government debt of AEs as a group has surpassed 100 per cent of GDP. Fiscal space
is also constrained in many of the advanced economies.
12. It is important in the backdrop of slowing global growth that policies of monetary and fiscal
authorities are well-calibrated so that they support growth without further build-up of leverage and
asset price bubbles. Prudent policies are critical to growth with macro-economic stability.
Globally, we need to focus on policy space, judiciously use it and simultaneously undertake
structural reforms to improve productivity, innovation and job creation. The coming year will test
IMF for its policy advice in these areas. How the IMF and the central banks provide forward
guidance will be key to sustaining global economic growth while maintaining financial stability.
13. I have highlighted a few concerns that have caused me to introspect considerably on the
future of the global monetary and financial system, especially as we confront these challenges
on a day-to-day basis at the RBI. A global search for effective solutions is underway. This quest
must be armed with the lessons of history and experience, and in this context, I commend this
book for your reading.
Thank you.
Institute of International Finance Spring Membership Meeting, Tokyo, June 6