India Back On U.S. Treasury’s Currency Manipulator Watchlist
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer/Dhiraj Singh Bloomberg)

India Back On U.S. Treasury’s Currency Manipulator Watchlist

The U.S. Treasury Department’s semi-annual report on the macroeconomic and foreign exchange policies of major trading partners has put India on the watchlist of countries being monitored for currency manipulation. This comes after the Indian central bank stepped up purchases of foreign currency as portfolio flows surged in the second half of the year.

The monitoring list comprises China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India. While India had been included in this list in 2018, it was removed in 2019.

The U.S. Treasury uses three benchmarks to judge currency manipulators:

  • A bilateral trade surplus with the U.S. of more than $20 billion.
  • A current account surplus of at least 3% of GDP.
  • Net purchases of foreign currency of 2% of GDP over a 12-month period.

India breached the first and the third benchmarks. On the second, on a four-quarter basis, the country’s current account surplus remained below the threshold level.

“India for several years has maintained a significant bilateral goods trade surplus with the United States, which totaled $22 billion in the four quarters through June 2020,” the report said. The economy’s first four-quarter current account surplus since 2004 stood at 0.4% of GDP over the year to June 2020, it said.

According to the report, net purchases of foreign currency added up to 2.4% of GDP. While the department acknowledged the RBI’s transparency in publishing data on intervention, it called for the central bank to allow the rupee to adjust based on fundamentals.

Treasury 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.   
U.S. Treasury Department Currency Report

Also read: RBI Monetary Policy: How Long Will The Impossible Trinity Last?

Problem Of Plenty

The surge of global liquidity added by global central banks have led to strong inflows into emerging economies like India.

So far this year, foreign portfolio flows alone have brought in a net of Rs 80,783 crore, according to data available on the National Securities Depository Ltd. One-off foreign direct investment flows have also come in this year.

In order to prevent sudden appreciation in the rupee, which in the past has led to disruptive corrections, the RBI has absorbed a large chunk of forex inflows. Since April 3, foreign exchange reserves have risen from $475.6 billion to $579 billion now.

The purchase of these forex flows in turn have added to the liquidity surplus in the domestic market, prompting analysts to question whether the RBI should permit more appreciation in the rupee.

The U.S. Treasury department’s decision to put India back on the currency manipulator’s watchlist could keep RBI somewhat “guarded on aggressive forex intervention”, said Madhavi Arora, economist at Emkay Global.

We note that the forex accretion has been the main mode of unsterlised primary liquidity injection this year. A slightly toned-down stance on forex (intervention) could be positive for the rupee at the margin. Ceteris Paribus, government securities may also gain marginally with consequential higher possibility of open market operations as mode of liquidity injection.
Madhavi Arora, Economist, Emkay Global

Also read: U.S. Labels Switzerland as FX Manipulator, Keeps China on Watch

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