What is Currency Manipulation? Know why US put India again on its currency monitoring list
Why in News?
The United States of America has again included India in its monitoring list of countries with “questionable foreign exchange policies” and “currency manipulation”. Prior to this India was removed from the list a year ago from the list prepared by the US Treasury. Every year the US Treasury Department’s submits a semi-annual foreign-exchange report to the US Congress.
What is currency manipulation?
- US government labels those countries with this term who it feels are engaging in unfair currency practices by devaluing their currency against dollar purposely.
- It means that the country in question is trying to artificially lower the value of its currency to gain an advantage over others.
- The devaluation in turn lowers the cost of exports from that country. It then artificially shows reduced trade deficits.
What is the effect of being on the list?
The designation of a country as a currency manipulator does not mean any penalties are imposed immediately, but in the longer run, it dents the confidence about a country in the global financial markets.
What puts a country on the Currency Monitoring List?
The country needs to meet two of the three criteria in the Trade Facilitation and Trade Enforcement Act of 2015. The conditions are:
- In case a country has incurred a significant bilateral trade surplus with the US, it is included in the list. The surplus however should be at least $20 billion over a 12-month period.
- In case any country has a material current account surplus that meets at least 2 per cent of gross domestic product over 1 year.
- In case any country is involved in a persistent, one-sided intervention that is when net purchases of foreign currency totalling at least 2 per cent of the country’s GDP over a 12 month period are conducted repeatedly, in at least six out of 12 months.
Countries on the Monitoring List
The US Department of the Treasury Office of International Affairs has included India, Taiwan and Thailand to its Monitoring List and has put them under the category of countries that “merit close attention” to their currency practices and macroeconomic rules.
The list also includes China, Japan, Korea, Germany, Italy, Singapore, Malaysia. Before this India was on the list from October 2018 to May 2019.
Why is India included again?
India’s bilateral goods trade surplus with the US has recently crossed the $20 billion mark. The trade surplus was totalled at 22 billion dollars in the first four quarters itself through June 2020.
The central bank released an intervention data which stated that India’s net purchases of foreign exchange rose a considerable amount in the latter half of 2019. After the sales during the initial outbreak of COVID 19 pandemic, India sustained net purchases for much of the first half of 2020. This pushed net purchases of foreign exchange to 64 billion dollars or 2.4% of GDP through June 2020.
India can now restrict the RBI in the foreign exchange operations it needs to pursue to protect financial stability. Currently, global capital flows are threatening to overwhelm domestic monetary policy. The results could involve appreciating rupee as well as excess liquidity that plays with the interest rate policy of the RBI.