The criteria for branding currency manipulators are rather simple. The US Treasury looks at three criteria: (1) foreign exchange intervention in terms of net purchase (either in GDP or dollar terms); (2) current account balance; and (3) bilateral trade with the US.
Parthapratim Pal is professor of economics, Indian Institute of Management Calcutta
Partha Ray is the director of National Institute of Bank Management, PuneThe semi-annual US Treasury report, ‘Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States’ (bit.ly/3eY1hW8), published in April, lists the countries whose exchange rate policies require its attention and monitoring. The unwritten subtext: these countries are essentially currency manipulators of varying degrees. India is on this list.
The criteria for branding currency manipulators are rather simple. The US Treasury looks at three criteria: (1) foreign exchange intervention in terms of net purchase (either in GDP or dollar terms); (2) current account balance; and (3) bilateral trade with the US. In assessing the persistence of intervention, the US Treasury considers an economy that is judged to have purchased forex on net for six of the 12 months to have met the threshold. If for any country all the three criteria are satisfied, then it requires its special monitoring. In other words, if a country has current account surplus in general, as well as with respect to the US, and if it had bought and sold forex in the forex market, then it would require close monitoring.
This year’s report lists Vietnam and Switzerland as the most-watched countries in their monitoring list. As per the report, China, Japan, South Korea, Germany, Ireland, Italy, India, Malaysia, Singapore, Thailand and Mexico — all trading partners of the US — also required close attention with respect to their currencies. Is it a matter of concern that India happens to be in the list?
A closer reading suggests that on these counts, the case against India is untenable. While India experienced a current account surplus in 2020, it happened largely because its imports declined more than its exports. The sharp decline in imports was due to poor domestic demand and supply chain disruptions due to the pandemic. So, the current account surplus for 2020 was not a result of mercantilist export expansion policies, but was a sign of a slowing domestic economy.
Second, bilateral trade data shows that while the US trade deficit has increased marginally against India, the change has been small. Regarding merchandise trade, the US report agrees that India’s goods trade surplus with the US was broadly in line with its average level since 2014. On the other hand, bilateral trade in services balance has improved for the US in Q4 FY2020.
The third allegation is regarding forex intervention by RBI during H2 FY2020. RBI did intervene to check the rupee from appreciating. However, its hand was forced by the spill-over effect of Federal Reserve’s ‘easy’ monetary policy. During the second half of 2020, India received huge amounts of short-term foreign capital flows in its debt and equity markets. This increased flow of portfolio capital is widely acknowledged as a direct result of the Fed’s pumping massive amount of liquidity through its unconventional monetary policy instruments.
In January, Shaktikanta Das rightly commented, ‘Under uncertain global economic environment, EMEs (emerging market economies) typically remain at the receiving end. In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators list or monitoring list of the US Treasury.’ Also, despite RBI intervention, the real effective exchange rate (REER) of rupee did not change much during this period.
So, such intervention could be more to do with neutralising the inflation differential between India and its trading partners. Given India’s declining exports, such intervention cannot be termed as currency manipulation. Thus, the US report essentially looks at an archaic template to group countries presumably antithetical to US interests. This serves as an illustration of dubious shadow boxing.