The U.S. may remove India from Currency Monitoring List
What is Currency Monitoring List?
U.S. Treasury Department releases a bi-annual report in which it lists the counties which are involved in the manipulation of the rate of exchange & intervention in the foreign exchange market.
What is currency intervention/currency manipulation?
It is an operation of buying and selling foreign currency in exchange of domestic currency which is undertaken by a Government of the Country or Central Bank of the country (for e.g. RBI for India). Central Bank mainly intervenes to ensure that their currency is neither overvalued or undervalued against foreign currency. It is generally done by the countries with an intention to influence the exchange rate or control inflation or bringing financial stability in the market or to gain an unfair competitive advantage in international trade/trade policy etc.
What are the factors/assessment criteria for labeling a country in the Currency Monitoring List?
There are three factors/assessment criteria –
- Persistent intervention in currency markets – means a continuous one-sided net purchase of foreign currency totaling to 2% or more of an economy’s GDP over a 12-month period.
- The significant trade surplus with the U.S. – means bilateral trade surplus with the U.S. is US$ 20 billion or more.
- Material current-account surplus – means a material current account surplus is 3% or more of gross domestic product (GDP)
If all the 3 assessment criteria are met then, the Treasury Department of the U.S. labels a country as a Currency Manipulator. If two of the above criteria are met then the country is put on the Currency Monitoring List.
How/when is the country’s name removed from the list?
When the country comes or falls in the limits prescribed in assessment criteria, the Treasury Department would remove the name from the list. But would continue to monitor and combat unfair currency practices made by the country. To resolve the issue bilateral negotiations are initiated by U.S. It also encourages countries to adopt policies and reforms to address large trade imbalances etc.
Which countries are there in the Currency Monitoring List?
The following six countries are there on the list:
- South Korea
- Switzerland and
India’s name is still there on the list as per the semi-annual report published on Wednesday i.e. 17th October’2018 by the Department of U.S. Treasury.
When was India’s name added to the list?
India was placed/added to the currency monitoring list for the first time in April 2018. India was not the alone country on the list who as per the U.S. have potentially questionable foreign exchange policies. There were five other countries namely China, Germany, Japan, South Korea, and Switzerland.
Why India was put on the Currency Monitoring List?
India was put on the currency monitoring list because it met with two out of three assessment criteria for currency manipulation/intervention. Following were the two criteria that were met by India :
- There was frequent/persistent one-sided intervention by RBI (Central Bank) in the foreign exchange market, annual purchases were $56 billion in 2017, equivalent to 2.2% of the GDP. (criteria is 2% or more of the GDP ).
- India had a significant trade surplus of bilateral goods with the U.S. totaling to $23 billion in 2017 (criteria is US$ 20 billion or more).
Why is the U.S. considering removing India’s name from the list?
Department of U.S. Treasury praised India for being “exemplary” in publishing its foreign exchange market intervention as net selling of foreign currency by India over Jan 18 to Jun 18 resulted in a reduction of net purchase of foreign currency to 0.2% of the GDP (as against criteria of 2% or more) over a 12-month period ending Jun 18.
If this continues, India would meet only one of the three criteria (i.e. trade surplus of US$ 20 billion or more), hence the U.S. Treasury would remove India from the Currency Monitoring List in its next bi-annual report.
How will this impact India?
When a country is included in the monitoring list, the US keeps a tab on the country’s currency monitoring options very closely. As a result, the central bank gets limited options to manage the currency. With the removal of India from the monitoring list, we expect wider availability of the control options with RBI and hopefully, the depreciation in Rupee, as well as the inflation, will be better controlled.