The US Treasury recently placed India on its currency manipulator watch list, prompting discussion and concern. This action marks the second time in as many years that India has been placed under scrutiny by the US for its financial policies; it was removed from the watch list in 2019. This latest development also sees Vietnam and Switzerland listed as currency manipulators.
Understanding Currency Manipulation
A country is labelled a ‘currency manipulator’ by the US government if the latter believes the former is engaging in unfair currency practices. Such practices typically involve a deliberate devaluation of the country’s currency against the US dollar. Artificial lowering of a currency’s value can confer an unfair advantage as it reduces the cost of exports, making them more appealing to international buyers. The result can be a misleading reduction in trade deficits.
The Currency Manipulator Watch List
The Department of Treasury in the US releases a semi-annual report where it scrutinises developments in international economies and examines foreign exchange rates. In order to be placed on this watch list, an economy must meet at least two out of three criteria established by the Trade Facilitation and Trade Enforcement Act of 2015. These criteria include:
– A “significant” bilateral trade surplus with the US — i.e., at least USD 20 billion over a 12-month period.
– A material current account surplus equivalent to at least 2% of gross domestic product (GDP) over a 12-month period.
– “Persistent”, one-sided intervention — namely, 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 six out of 12 months.
Although placement on this list does not incur any formal penalties or sanctions, it can impact a country’s global financial reputation, particularly with regard to foreign exchange policies and currency undervaluation practices designed to boost export advantages.
India’s Position
India has landed on the watch list, alongside Taiwan and Thailand, joining China, Japan, Korea, Germany, Italy, Singapore, and Malaysia. According to the US Treasury’s report, India and Singapore intervened in the foreign exchange market in a “sustained, asymmetric manner” but didn’t meet other requirements to be deemed manipulators.
India’s inclusion comes because it has maintained a substantial bilateral goods trade surplus with the US for several years, and that surplus crossed the USD 20 billion mark, according to the latest report. The trade surplus totalled USD 22 billion in the first four quarters through June 2020.
Additionally, India’s net purchases of foreign exchange grew markedly in the second half of 2019 and, despite sales during the initial onset of the COVID-19 pandemic, they remained high throughout much of the first half of 2020. This pushed net purchases of foreign exchange to USD 64 billion — or 2.4% of GDP — over the four quarters through June 2020.
As a result of these observations, some experts predict that India’s inclusion on the watch list could cause the rupee to appreciate, as the Reserve Bank of India (RBI) may choose to scale back its dollar purchases. Currency appreciation refers to an increase in a currency’s value relative to another currency, indicating a strengthening of the former against the latter.