Simply Put: Why India is on US currency monitoring list

Simply Put: Why India is on US currency monitoring list

Context

For the first time, it meets two of three criteria: significant bilateral surplus with US; and persistent intervention in forex markets

What does the report say?

India met two of the three criteria for the first time in this report — having a significant bilateral surplus with the US and having engaged in persistent, one-sided intervention in foreign exchange markets

How do central banks intervene and why?

• If the currency is overvalued, it can hurt a country’s competitiveness in exports while an undervalued currency will have an impact on inflation
• For instance, when the currency is appreciating, a central bank intervenes in the market by buying foreign exchange — say, the USD or Euro or any other currency — which leads to an increase in the supply of the local currency and in turn lowers its value
• To combat depreciation of the currency, the central bank sells foreign exchangeIt is also done to manage expectations in the forex market. India’s central bank — the RBI has intervened in the market to build the country’s reserves especially after 2013 when the rupee came under attack. Since then reserves have risen

On what basis is a country named a ‘currency manipulator’?

The three pre-conditions for being named currency manipulator are:

Trade surplus of over $20 billion with the US, a current account deficit surplus of 3% of the GDP, and persistent foreign exchange purchases of 2% plus of the GDP over 12 months. All three apply to India.

What about the rupee? Will this report of the US Treasury impact the currency?

Forex dealers don’t expect a sharp fall as the RBI then props up the rupee by selling dollars.

How have India’s foreign exchange reserves moved?

According to latest RBI data, released last Friday, India’s forex reserves rose by $503.6 million to touch a record high of $424.86 billion in the week ended April 6, 2018. Of this, foreign currency reserves were $399.776 billion.