For one more time, the United States has placed the Indian subcontinent in its monitoring list. This list contains all the countries with potentially “currency manipulation” and “questionable foreign exchange policies”. A year before India was removed from the watchlist in the US Treasury Department’s semiannual foreign-exchange report submitted to the US Congress. According to the US treasury department, once a country is included in the Monitoring List it is likely to stay there for at least two consecutive reports. This is done to ensure that any improvement in performance versus the criteria is due to long term conditions and decisions and not due to temporary factors. The last time India was included in the currency watchlist was in October 2018 after which it was removed from the list that came out in May 2019.
What do we mean by the term ‘currency manipulator’?
“Currency Manipulator” is a term coined by the government of the United States to refer to countries it feels are engaging in “unfair currency practices”. A country can carry out unfair activities by deliberately devaluing their currency against the dollar, meaning that the country in question is artificially lowering the value of its currency in order to gain an unfair advantage over others by simply manipulating the world economics. The devaluation of the home currency would reduce the cost of exports from that country, ultimately showing a reduction in trade deficits as an artificial result. It is less likely that the consideration of a country as a currency manipulator would immediately attract any penalties. However, it tends to dent the confidence about a country in the financial markets across the world.
How does the US government decide the list? And What are the parameters used?
Any economy fulfilling two of the three below listed criteria in the Trade Facilitation and Trade Enforcement Act of 2015 is placed by the US government on the Monitoring List.
- An economy having a “significant” bilateral trade surplus with the United States. The surplus shall be at least $20 billion over a 12-month period.
- An economy having a material current account surplus tantamount to at least 2 per cent of gross domestic product (GDP) over a 12-month period.
- When net purchases of foreign currency amount to a sum total of at least 2 per cent of the country’s GDP over a 12-month period being conducted on a repeated basis in at least six out of 12 months.
EXCEPTION: The administration can many times also include and retain all those countries on the Monitoring List which are major US trading partners and accounts for a “large and disproportionate” share of the overall US trade deficit. In such a case it does not matter if the economy has met two of the three criteria from the 2015 Act or not.
Why has the US put India back in the Monitoring List once more?
India has maintained a “significant” bilateral goods trade surplus with the US for several years. It has also crossed the $20 billion mark as per the information by the latest report with its Bilateral goods trade surplus totalling to $22 billion in the first four quarters through June 2020.
According to the central bank’s intervention data, the net purchases of foreign exchange by India rose notably in the second half of 2019 followed by the sales during the initial coronavirus pandemic stage when the country sustained net purchases for much of the first half of 2020. This pushed its net purchases of foreign exchange to 2.4% of GDP ($64 billion) over the four quarters through June 2020.
Which countries apart from India are also included in the latest monitoring list?
In its latest report to the US Congress, the US Department of the Treasury Office of International Affairs has included Taiwan, Japan, Korea, Germany, Italy, Singapore, Malaysia, and Thailand apart from India to its Monitoring List of major trading partners. The list was to attract close attention to their currency practices and macroeconomic policies followed by these economies. Needless to say, along with the other countries in the latest list the US administration has also included its long trade war opponent and a gradually rising superpower nation- China.