India Is On U.S’ Currency Manipulation Watchlist. Again.
Why has the U.S put India and other nations on its currency manipulation watchlist?
What Happened?
Switzerland and Vietnam have been labelled as currency manipulators by the U.S Treasury. Also, in the U.S Treasury’s December 2020 report, Taiwan, Thailand and India have been added to the Monitoring List.
Manipulating The Currency
A country gets the tag of ‘Currency Manipulator‘ when they meet the below three criteria:
- A significant bilateral trade surplus with the United States that is at least $20 billion over a 12-month period
- A material current account surplus that is at least 2% of gross domestic product (GDP) over a 12-month period
- Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total at least 2% of an economy’s GDP over a 12-month period
After labelling a country as a currency manipulator, the U.S tries to solve it through bilateral talks. So, what did India do that landed it on the list?
Why India?
According to the report, for several years, India has maintained a considerable bilateral goods trade surplus with the U.S, which totalled $22 billion in the four quarters through June 2020.
In order to help India from the collapse in domestic demand brought on by the pandemic, the authorities responded with modest direct fiscal support of around 2% of GDP and considerable monetary easing.
The report has also stated, based on RBI’s regularly published intervention data, India’s net purchases of foreign exchange rallied significantly in the second half of 2019. Also, following sales during the initial onset of the pandemic, India sustained net purchases for much of the first half of 2020. This drove net purchases of foreign exchange to $63 billion or 2.4% of GDP over the four quarters through June 2020.
So, there it is: The report has shown that India has intervened in the foreign exchange market in a “sustained, asymmetric manner”. However, India did not meet the other requirements to warrant designation as a manipulator.
Zooming Out
According to bankers, quoted in an article by TNN, the tag could lead to the rupee appreciating as the RBI might step back from purchasing the dollar. Instead of buying dollars, the RBI may hike diversification of its reserves to include non-dollar assets. Also, a stronger rupee would partially offset the impact of surging oil prices on imports.
Referring to India’s inclusion in the list, the report said that the Indian authorities are being encouraged to limit foreign exchange intervention to periods of excessive volatility while allowing the rupee to adjust based on economic fundamentals. The report also said, by further opening the economy to foreign investors, India can also support economic recovery and augment long-term growth.
Being added to the currency manipulator watch list is not new for India. In fact, this is the third time India has been added to the list after it was removed from the list last year. Since this doesn’t move by the U.S Treasury doesn’t involve any trade restrictions, we might not see a big impact in the U.S-India trade relationship front. Also, we feel that this is temporary, and India might be removed from the list soon. However, we have to wait and see how all of this plays out for India and the U.S.
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