Can India be the next currency manipulator?

Forex Hedging | 10 min Read

Uploaded on: 27th March 2021

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Currency Manipulator is a designation applied by the United States Department of the Treasury to countries that engage in unfair currency practices that give them a trade advantage. According to the December 2020 report by the US Department of Treasury, the following criteria is used to determine countries which should be added to the currency manipulator watchlist:

  • a significant bilateral trade surplus with the United States – $20billion threshold
  • a material current account surplus – 3% of GDP threshold
  • engaged in persistent one-sided intervention in the foreign exchange market – net purchases of forex at 2% of GDP threshold

India’s position with respect to these criteria is as follows:

CriterionLimitIndia's Expected Figures
Bilateral Trade Surplus$20 billionUSD 23.795 Billion
Current Account Surplus3% of GDP2% of GDP
Net Purchases of Forex2% of GDP> 2% of GDP

Although the US Treasury department has commended transparency efforts made by the Indian government, India has still been added to the monitoring list of currency manipulators which also includes Japan, South Korea, Germany, Italy, Singapore, Malaysia, China, Taiwan, and Thailand. The grounds for adding all these countries to the monitoring list is meeting any two criteria mentioned above.

The December 2020 report compiled and analyzed 12-month data till June 2020. Over the same period, RBI made net purchases of dollars and India’s bilateral trade surplus exceeded the $20 Billion USD Limit. Having met two of the three criteria, it showed a current account deficit in its BOP account which meant that it was added to the watchlist and not termed as an active currency manipulator. The report also encouraged government intervention during periods of extreme volatility only. Increasing foreign investment in sovereign and sub-sovereign bonds for long-term growth is also suggested in the report.

Vietnam and Switzerland breached all three criteria and have therefore been termed as active currency manipulators which is one step up from being on the monitoring list. The report does not specifically say what kind of sanctions will be levied on countries flagged as currency manipulators. Recommendations to improve the situation are generally made by the US treasury to the countries flagged. Historically speaking, significant actions have not been taken against currency manipulators. However, looking at the weakness in the Dollar, the US Treasury’s stance towards currency manipulators is expected to change. If corrective action is not taken, the US can block access to government contracts and development finance. Vietnam may also be hit with tariffs according to some reports. This may seem vague, but we must remember that the US wields massive influence over the world economy and trade as a superpower.

The US Treasury Department’s report is semi-annual and the next report is due in May 2021. India’s bilateral trade surplus with the US for the year 2020 stands at 23.795 Billion USD and according to Economic Survey, India’s current account surplus is expected to be around 2% of GDP for the year 2020-21, still short of the 3% limit but tending towards it. RBI has continued to shore up its foreign exchange reserves over the past year and is expected to easily surpass the 2% of GDP threshold.

There is still a lot of uncertainty surrounding the US government stance when the report was published in December 2020. More recently, in a press conference on Shaktikanta Das, the RBI governor expressed that it is important for nations to build up forex reserves to tide over external shocks, in spite of being added to the monitoring list. This seemed like a retaliatory response to the December report which added India to the monitoring list.

India needs to have capital buffers to ensure the stability of the rupee. A short-term risk for capital markets, when interest rates in developing countries rise back, also looms over the RBI’s head. In such a volatile scenario, India has built up all-time high reserves worth 584 billion as of January 15th, 2021. This makes India the 5th largest holder and looks to beat Russia to become the 4th largest holder very soon.

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