India Added To The United States’ Monitoring List For Currency Manipulation

On 16th December, The United States of America’s treasury department released its semi-annual report on macro-economic and foreign exchange policies of the major trading partners of the US.

The treasury works to dismantle unfair barriers to trade and achieve free and reciprocal trade with major US partners. The report contained their review and assessment of the policies of twenty major economies such as China, India, Ireland trading with the United States in the four quarters through June 2020. The report put India back on the monitoring list for currency manipulation, along with Thailand and Taiwan. While Ireland was removed from the list, they’ve branded Switzerland and Vietnam as countries which are manipulating their currencies.

The monitoring list is a policy instrument developed by the US treasury department to monitor US trading partners in close relation to their foreign exchange policies and macroeconomic practices. This policy instrument was created under the United States’ ‘Omnibus Trade and Competitiveness Act of 1988’ (1988 Act). The act requires the secretary of the United States treasury department to submit a semi-annual report to the congress on international economics and exchange rate policy. The semi-annual ‘monitoring list’ for the year 2020 included economies like China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan and Thailand. India had been included in the monitoring list in the year 2018, however, was removed from the list in the year 2019.

A country is entered into the monitoring list when they meet the two out of three criteria set under trade facilitation and trade enforcement act of 2015 (2015 Act). 

The three criteria of Act 2015 are:

1. The country must at least have a surplus of $20 billion-plus in bilateral trade with the United States.

2. A current account surplus of at least 3%  of the country’s GDP

3. The net purchase of foreign currency exceeding 2% of the GDP for a year. 

Reasons for India’s enrollment in the currency monitoring list 

India has maintained a bilateral good surplus against the US for the last few years, which has reached $22 billion in June 2020. Furthermore, India has a $5 billion surplus in bilateral trade for services with the United States. India’s export to the United States is in line with its global specialization, that is, diamonds, pharmaceuticals, and IT, while India’s import from the United States reflects India’s domestic demand for products like fuel, aircraft, software and higher education.

Additionally, with a sudden increase in global liquidity by global banking institutions there has been an  increase in investment in the developing economies like India. According to the quarterly fact sheet (of FDI) from April to September 2020 released by India’s department of promotion of industry and internal trade, India has attracted foreign investment worth $ 7.12 billion from the United States for April 2020 to September 2020. These instances have resulted in an appreciation of the rupee.

However, to prevent such a stark rise in the valuation of the rupee, the Reserve Bank of India (RBI) has swallowed up a significant chunk of foreign direct investment (FDI) and has increased its foreign reserves from $475.6 billion on 3rd April, 2020 to $579 billion as of 11th December, 2020. This massive investment by RBI is due to fear of the disruptive correction following a sudden appreciation in the rupee

According to the annual transparency report published by RBI on data intervention, India has accelerated the purchase of foreign exchange in the latter half of 2020. Hence, India stands at the net foreign currency purchase of 2.4 % of the GDP at $64 billion.

India has met two conditions out of three under the act and hence, its entry into the US ‘monitoring list’ for currency manipulation.   

The US treasury department has acknowledged RBI’s transparency in the publishing of data related to foreign exchange intervention, however, it also suggested that RBI should allow the rupee to adjust back based on the fundamentals.

The report states that the Treasury continues to welcome India’s long-standing transparency in publishing foreign exchange purchases and sales. 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.  The report also mentioned that India and Singapore have interfered in the forex market in a sustained and asymmetric manner, which can be interpreted as an unplanned move by both the countries and did not meet the third criteria set by the 1998 act and 2015 act. Hence, were not branded as currency manipulators.

The United States’ treasury department will track the macroeconomic policies and currency practices of the 20 major countries trading with the United States. According to Madhvi Arora, an economist at Emkay Global, the decision to put India on the monitoring list will make India’s central bank (RBI) more guarded on aggressively intervening in the foreign exchange market.

However, according to Sanjeev Sanyal, the principal advisor in India’s finance ministry, RBI is doing the appropriate thing. They are accumulating reserves at a time when they are managing the exchange rate in a sensible way. Though this statement was given before the report was released. The RBI has not responded to India being moved back to the monitoring list as of now.

While India has rejoined the watch list for currency manipulation, it cannot be denied that RBI has purchased the foreign exchange in fear of disruptive currency corrections that India had faced previously due to sudden currency appreciation. The report acknowledges India’s transparency in the data related to the intervention of foreign exchange and mentions the sustainable and asymmetric approach used by India to maintain its foreign exchange levels. The report also suggests that RBI allows the movement of Indian currency as per economic fundamentals and limits their intervention.