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December 23, 2020

India added to Currency Manipulator Watchlist. What does it mean?

by CA Shivam Jaiswal in RBI

India added to Currency Manipulator Watchlist. What does it mean?

The US recently put India on its “monitoring list” of currency manipulating countries for the third time. This came after the Reserve Bank of India (RBI) made relentless dollar purchase, leading to forex reserves rising by $100 billion this fiscal. Along with India, Taiwan, Thailand Vietnam and Switzerland were also branded as currency manipulators. Other countries in the latest list comprise China, Japan, Korea, Germany, Italy, Singapore, Malaysia. This comes a year after India was removed from the watchlist in the US Treasury Department’s semi-annual foreign-exchange report to the US Congress.

What do you mean by ‘currency manipulator’?

  • Currency manipulator is a designation applied by United States government authorities, such as the United States Department of the Treasury, to countries that engage in what is called “unfair currency practices” that give them a trade advantage.
  • Such practices may be currency intervention or monetary policy in which a central bank buys or sells foreign currency in exchange for domestic currency, generally with the intention of influencing the exchange rate and commercial policy.
  • Policymakers may have different reasons for currency intervention, such as controlling inflation, maintaining international competitiveness, or financial stability.
  • In many cases, the central bank weakens its own currency to subsidize exports and raise the price of imports, sometimes by as much as 30-40%, and it is thereby a method of protectionism.
  • Currency manipulation is not necessarily easy to identify and some people have considered quantitative easing to be a form of currency manipulation.

What are the parameters used to determine a ‘currency manipulator’?

  • An economy meeting two of the three criteria in the Trade Facilitation and Trade Enforcement Act of 2015 is placed on the Monitoring List. This includes:
  • A “significant” bilateral trade surplus with the US — one that is at least $20 billion over a 12-month period.
  • A material current account surplus equivalent to at least 2 percent of gross domestic product (GDP) over a 12-month period.
  • “Persistent”, one-sided intervention — when net purchases of foreign currency totalling at least 2 % of the country’s GDP over a 12-month period are conducted repeatedly, in at least 6 out of 12 months.
  • Once on the Monitoring List, an economy will remain there for at least two consecutive reports “to help ensure that any improvement in performance versus the criteria is durable and is not due to temporary factors,” according to the US treasury department.
  • The administration will also add and retain on the Monitoring List any major US trading partner that accounts for a “large and disproportionate” share of the overall US trade deficit, “even if that economy has not met two of the three criteria from the 2015 Act”.

Why is India back in the Monitoring List again?

  • India, which has for several years maintained a “significant” bilateral goods trade surplus with the US, crossed the $20 billion mark, according to the latest report.
  • Bilateral goods trade surplus totalled $22 billion in the first four quarters through June 2020.
  • Based on the central bank’s intervention data, India’s net purchases of foreign exchange accelerated notably in the second half of 2019.
  • Following sales during the initial onset of the pandemic, India sustained net purchases for much of the first half of 2020, which pushed net purchases of foreign exchange to $64 billion–or 2.4% of GDP–over the four quarters through June 2020.

What did ‘monitoring list’ report state?

  • The ‘currency-manipulating countries’ report noted that based on RBI’s regularly published intervention data, India’s net purchases of foreign exchange accelerated notably in the second half of 2019, and following sales during the initial onset of the pandemic, India sustained net purchases for much of the first half of 2020.
  • This pushed net purchases of foreign exchange to USD 64 billion, or 2.4 per cent of GDP, over the four quarters through June 2020.
  • Treasury continued to welcome India’s long-standing transparency in publishing foreign exchange purchases and sales.
  • The report added that it encourages the authorities to limit foreign exchange intervention to periods of excessive volatility, while allowing the rupee to adjust based on economic fundamentals.
  • By further opening the economy to foreign investors, India can also support economic recovery and bolster long-term growth.
  • According to the Treasury, India’s economy contracted sharply in the first half of 2020 due to the collapse in domestic demand brought on by the COVID-19 pandemic.
  • The authorities responded with modest direct fiscal support of around 2% of GDP and substantial monetary easing.
  • India’s deep domestic demand contraction and slower recovery relative to its key trading partners contributed to the economy’s first four-quarter current account surplus since 2004 (0.4 % of GDP over the year to June 2020).
  • India for several years has maintained a significant bilateral goods trade surplus with the United States, which totalled USD 22 billion in the four quarters through June 2020.
  • The Treasury said that India has been exemplary in publishing its foreign exchange market intervention, publishing monthly spot purchases and sales and net forward activity with a two-month lag.
  • The RBI stated that the value of the rupee is broadly market-determined, with intervention used only to curb undue volatility in the exchange rate.

What does it mean for India and the economy?

  • With the tag back on, bankers now believe that it could lead to the rupee appreciating as the RBI is likely to step back from its dollar purchases.
  • For the economy, a stronger rupee would partially offset the impact of rising oil prices on imports, the leading daily stated further in the report.
  • No trade restrictions come with the tag.
  • Further, the central bank is also expected to increase diversification of its reserves.
  • The designation of a country as a currency manipulator does not immediately attract any penalties, but tends to dent the confidence about a country in the global financial markets.

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