The U.S. government recently placed 11 countries, including India, on its Currency Practices Monitoring List (also known as the Currency Manipulators Watch List). This is not the first time that India has received this designation, as it was also on the list in the December 2020 report. Interestingly, in 2019, India was removed from this watchlist by the U.S. Treasury Department.
Understanding Currency Manipulators
When the U.S. labels a country as a currency manipulator, it signifies that they believe the country to be engaging in “unfair currency practices.” This label is typically applied to countries that are thought to be deliberately devaluing their currency against the dollar. Countries might do this in order to artificially reduce the value of their currency, thereby gaining an unfair advantage over other nations. The devaluation would decrease the cost of exports coming from that country and may create the illusion of a reduction in trade deficits.
The Currency Manipulator Watch List Definition and Criteria
The U.S. Department of Treasury is responsible for releasing the semi-annual report that includes the Currency Manipulator Watch List. This list tracks developments in international economies and investigates foreign exchange rates. The currency practices of the U.S.’s top 20 trading partners are also reviewed.
To make it onto the Watch List, an economy must meet two out of three criteria from the Trade Facilitation and Trade Enforcement Act of 2015: having a significant bilateral trade surplus with the U.S., having a material current account surplus equivalent to at least 2% of GDP, or demonstrating persistent, one-sided intervention where at least 2% of the country’s GDP is used in net purchases of foreign currency for at least six out of 12 months. Those countries meeting all three criteria are officially labeled as currency manipulators by the Treasury.
Who’s On the List?
India, along with 10 other countries, currently meets the criteria to warrant “close attention to their currency practices.” The list includes China, Japan, Korea, Germany, Ireland, Italy, Malaysia, Singapore, Thailand, and Mexico.
The Issue with China
China’s economic growth in 2020 outpaced that of other large economies. Nonetheless, questions remain about the sustainability of this recovery, particularly without a sustained increase in household consumption. Concerns also exist related to China’s lack of transparency in its exchange rate mechanism, foreign exchange intervention, and the actions of its state-owned banks. As a result, the U.S. plans to closely monitor any developments with the renminbi, China’s currency.
India’s Position
As per the set criteria, India met two of the three standards: a significant trade surplus and persistent, one-sided intervention.
The Implications of Being Labeled
Although being placed on the list does not result in any immediate penalties or sanctions, it could tarnish a country’s global financial reputation. Investors may take a negative view of countries on the list due to concerns about potential foreign exchange policy manipulation, including currency undervaluation to gain export advantages.
