Daily Editorial Analysis for 18th December 2020

India is back on currency manipulator list

Paper:

Mains: G.S. II & III Polity and Governance, Economy related issues

Context

The United States has once again included India in its monitoring list of countries with potentially “questionable foreign exchange policies” and “currency manipulation”.
The US Department of the Treasury Office of International Affairs, in its latest report to the US Congress, has included India, Taiwan and Thailand to its Monitoring List of major trading partners that “merit close attention” to their currency practices and macroeconomic policies.

Basics of currency manipulation

This is a label given by the US government to countries it feels are engaging in “unfair currency practices” by deliberately devaluing their currency against the dollar.
The practice would mean that the country in question is artificially lowering the value of its currency to gain an unfair advantage over others.
This is because the devaluation would reduce the cost of exports from that country and artificially show a reduction in trade deficits as a result.

What is devaluation

Devaluation of a currency is associated with countries having a fixed exchange rate regime.
Here, the central bank or the the government decides the value of the currency with respect to other foreign currencies.
When the government/central bank reduces the value of its currency, then it is known as devaluation of the currency.
Under this, the value of the domestic currency is deliberately reduced in terms of other foreign currencies.

Reasons and objectives of the currency devaluation

Disadvantages of currency devaluation

What are the parameters used to put a country as currency manipulator

Economy meeting two of the three criteria in the Trade Facilitation and Trade Enforcement Act of 2015 is placed on the Monitoring List. This includes:
A “significant” bilateral trade surplus with the US — one that is at least $20 billion over a 12-month period.
A material current account surplus equivalent to at least 2 percent of gross domestic product (GDP) over a 12-month period.
“Persistent”, one-sided intervention — when net purchases of foreign currency totalling at least 2 percent of the country’s GDP over a 12 month period are conducted repeatedly, in at least six out of 12 months.
Once on the Monitoring List, an economy will remain there for at least two consecutive reports “to help ensure that any improvement in performance versus the criteria is durable and is not due to temporary factors,” according t

What can be the possible reason behind US releasing such list

The most significant and prominent reason could be to resolve it’s TRIFFIN DILEMMA.

Why is India back on monitoring list again

India, which has for several years maintained a “significant” bilateral goods trade surplus with the US, crossed the $20 billion mark, according to the latest report. Bilateral goods trade surplus totalled $22 billion in the first four quarters through June 2020.
Based on the central bank’s intervention data, India’s net purchases of foreign exchange accelerated notably in the second half of 2019.
India sustained net purchases for much of the first half of 2020, which pushed net purchases of foreign exchange to $64 billion–or 2.4% of GDP–over the four quarters through June 2020.

Implications for India

India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other.
India being on the watch list could restrict the RBI in the foreign exchange operations it needs to pursue to protect financial stability.
The two most obvious consequences could be an appreciating rupee as well as excess liquidity that messes with the interest rate policy of the RBI.
Indian policymakers have to be sensitive for the unpredictable nature of policy-making in the US under Trump, especially concerning global trade.