The US Treasury has added India to a list of countries whose foreign exchange and economic policies are under its close scrutiny.
India is now giving company to China, Japan, Germany, South Korea and Switzerland. The department said that no major US trading partner "was found to have met the legislative standards for currency manipulation."
Let's take a closer look at what this recent move mean for India and its possible implications on the economy:
What is currency manipulation?
Currency manipulation or currency intervention is a monetary policy operation which occurs when a government or central bank buys or sells foreign currency in exchange of their domestic currency, generally with the intention of influencing the exchange rate and trade policy.
Why is India labeled a currency manipulator?
India was added to the list because it meets two of the three criteria laid down by the US Treasury. It uses three benchmarks:
- A bilateral trade surplus with the U.S. of more than $20 billion.
- A current account surplus of at least 3 percent of GDP.
- Net purchases of foreign currency of 2 percent of GDP over a 12-month period.
India, the report finds, meets the first and third criteria.
How serious are the findings of the report?
It is important to recognize that India has been put on a watch list rather than being actually accused of manipulating its exchange rate to hurt US interests. Therefore it shouldn't be a grave concern for India.
Can India be accused of currency manipulation in future?
If a country such as China with a massive bilateral trade surplus with the US, a large current account surplus with the rest of the world, and historically unprecedented management of its exchange rate is still only on the watch list, then the chances of India being actually termed a currency manipulator are slim.
So, the report will not stop RBI from intervening against rupee appreciation?
According to Mint, the mere fact that India is on the watch list now could restrict the Reserve Bank of India (RBI) in the foreign exchange operations it needs to pursue to protect financial stability, especially when global capital flows threaten to overwhelm domestic monetary policy.
What next for policymakers?
Indian policymakers have to be sensitive, without actually overreacting. India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other. A lot now rests on how the Indian government and the Indian central bank respond to the implicit US threat.