India is included yet again in the watchlist of the United States monitoring list of countries who have questionable foreign exchange policies and currency manipulation. India was removed from the watchlist a year before in the semi-annual foreign exchange report of the US Treasury Department to the US Congress.
Before getting in any further, the first and foremost question that arises is what exactly does “currency manipulation” mean?
This is a tag given by the US government to countries that they feel are involved in “unfair currency practices”, meaning, they are purposely devaluing their currency against the dollar.
So what exactly is happening is that the said country who is on the list is artificially lowering the value of its currency so as to gain benefit by unfair means. By this devaluation, the cost of exports from this country would be reduced and in turn, artificially show a reduction in the trade deficits.
The next question that comes to mind is, How do they know? Is there any parameter to check?
There are three criteria that an economy is judged upon. These criteria are given in the Trade Facilitation and Trade Enforcement Act of 2015, which are;
- Is there any significant bilateral trade surplus with the US? Here significant means one that is at least $ 20 billion over a span of 12 months
- There should be a current account surplus equal to 2% of the GDP at least over a span of 12 months
- If there is a persistent one-sided intervention and when the net purchases of foreign currency add up to 2% of the country’s GDP over a span of 12 months and the repetition are conducted in at least 6 months out of 12 months span
If the countries fall under the criteria set above, they are added to the Monitoring List. Once any country enters the list, they remain there for a period of at least 2 consecutive reports by the US Treasury Department. The aim is to help and ensure that any improvement in performance is not because of the temporary factors but are long term improvements.
Any major US trading partner that accounts for a “large and disproportionate” share of the overall US trade deficit, will also be added and also retained by the administration to the Monitoring List even if the two criteria are not met out of the three from the 2015 Act.
Interestingly, as per the latest monitoring list, following are the countries that have made it to the list:
The first three countries have been added on the basis of major trading partners that “merit close attention” to their currency practices and macroeconomic policies.
India has a little history with this list. India was included in the currency watchlist in October 2018, but let’s look at the silver lining here, it got removed from the list in May 2019.
So, If any country made it to this list, do they have to pay any kind of fine or penalty?
Such designation of a country as a “currency manipulator” actually doesn’t attract any penalties upfront but definitely shakes up the confidence of that country in the global financial markets.
Why is India back on this List?
India in the first four quarters through June 2020 crossed the “significant” mark of $20 billion bilateral goods trade surplus with the US and as per the latest reports, it is marked at $22 billion.
As per the central bank’s intervention data, the net purchases of foreign exchange by India hiked drastically in the second half of 2019 which was followed by sales during the initial onset of the pandemic. India was able to survive the net purchases in the first half of 2020, eventually, the net purchases of foreign exchange increased to $64 billion which accounts for 2.4% of GDP over the span of four quarters through June 2020.