In a surprise move, the US added India to its monitoring list of possible currency manipulators. The US Treasury Department, in its recent semi-annual report on ‘Macroeconomic and Foreign Exchange Policies of Major Trading Partners’, has included India and five other major trading partners — China, Japan, Germany, South Korea and Switzerland — to this watch-list. However, no country has been termed a currency manipulator yet.
The US uses three criteria to decide whether a country is manipulating its currency or not. If any state meets two of the three requirements, then it is placed in the ‘Monitoring List’. The US conducts this exercise to check if any country has an unfair advantage in international trade.
So, what are these criteria? Is this move a matter of concern for India?
Criteria 1: Trade surplus with the US
The first filter, used by the US to identify currency manipulation, looks at the amount of a country’s foreign trade surplus with the US. A country is said to have a trade surplus with another if its exports is more than its imports with that partner.
Any country that has trade surplus of at least $20 billion with the US fulfills this criterion. Seven major countries come under this category — China (with a surplus of $375 billion), Mexico ($71 billion), Japan ($69 billion), Germany ($64 billion), Italy ($32 billion), South Korea and India (each with $23 billion).
As China tops the table it is facing additional tariffs on its exports to the US. The surplus of other countries is relatively lesser. Though India’s number isn’t very high, it has had a surplus with US for many years now, through multiple cycles of rupee appreciation and depreciation. It will be hard to establish that India manipulated its currency in order to make its exports more competitive.
Criteria 2: Current account surplus
Countries with large current account surpluses are also viewed askance by the US Treasury. The current account depicts a country’s external transactions. If the net value (credit minus debit) of this account is positive, then it is said to be in surplus while a negative value indicates that the country runs a current account deficit.
A country with a current account surplus in excess of 3 per cent of its GDP meets the criterion, qualifying as a potential currency manipulator. Five nations — Japan, Germany, Taiwan, South Korea and Switzerland — fulfill the requirement. India, however, has been in deficit consistently.
As of the quarter ending December 2017, India had a current account deficit of $13.48 billion.
Criteria 3: Forex intervention
A country’s intervention in its forex market to control the exchange rate is the third filter. To gauge this, the US Treasury takes the net purchase of foreign currencies by a country over a 12-month period. If the net foreign currency purchase is in excess of 2 per cent of the country’s GDP, then it is considered as one-sided intervention to control the exchange rate.
India and Switzerland are the only two major trade partners of US that meet this criterion. The Treasury Department states that India purchased $56 billion worth foreign currency in 2017, which is 2.2 per cent of its GDP.
The RBI has however stated that its interventions are only to control volatility and not to manipulate the currency. Despite the RBI’s purchase of foreign currency in 2017, the rupee only appreciated against the US dollar by over 6 per cent. A strong rupee is not conducive to exports and proves that the RBI is not purchasing dollars to control the rupee appreciation.
Take away
India has met two of the three criteria listed by the US Treasury but the chances of it being termed a currency manipulator appear remote, given the country’s current account deficit and minimal trade surplus with the US. It will also be difficult to establish that the RBI is buying dollars to influence the movement of the rupee.