Explained: What is currency manipulation and why did the US put India, others on their currency checklist?

Written by Prabha Raghavan, edited by Explained Desk | New Delhi |

Updated: December 17, 2020 16:04:16

Currency manipulation occurs when a country artificially lowers the value of its currency to gain an unfair advantage over others. (Bloomberg photo: Dhiraj Singh, File)

The US has once again included India on its watch list of countries with potentially “questionable exchange policies” and “currency manipulation”. This comes a year after India was removed from the checklist in the US Treasury Department’s semi-annual foreign exchange report to the US Congress.

What does the term “currency manipulator” mean?

This is a label given by the US government to countries it believes 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, consequently, artificially show a reduction in the trade deficit. 📣 Follow Express Explained on Telegram

What are the parameters used?

An economy that meets two of the three criteria of the Trade Facilitation and Trade Enforcement Act 2015 is placed on the monitoring list. This includes:

1. A “significant” bilateral trade surplus with the United States – at least $ 20 billion over a 12-month period.

2. A substantial current account surplus of at least 2% of gross domestic product (GDP) over a 12-month period.

3. Unilateral “persistent” intervention – when net purchases of foreign currency totaling at least 2 percent of the country’s GDP over a 12-month period are made 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 ensure that any improvement in performance against the criteria is durable and not due to temporary factors,” according to the US Treasury Department.

The administration will also add and retain major US trading partners that account for a “large and disproportionate” share of the overall US trade deficit, “even if that economy did not meet two of the three criteria of the 2015 law. “.

What are the other countries on the latest monitoring list?

The US Department of the Treasury for International Affairs, in its latest report to the US Congress, included India, Taiwan and Thailand in its Monitoring List of Major Trading Partners that “Deserve Great Attention” to their currency practices and policies macroeconomic.

The other countries on the most recent list include China, Japan, Korea, Germany, Italy, Singapore, Malaysia.

India was last included in the currency watch list in October 2018, but was removed from the list published in May 2019.

Designating a country as a currency manipulator does not immediately attract sanctions, but tends to undermine a country’s confidence in global financial markets.

Why is India on the monitoring list again?

India, which for several years has maintained a “significant” bilateral trade surplus in goods with the United States, has passed the $ 20 billion mark, according to the latest report. The bilateral trade surplus in goods was $ 22 billion in the first four quarters through June 2020.

Based on central bank intervention data, India’s net purchases of foreign currency accelerated in the second half of 2019. After selling during the initial onset of the pandemic, India supported net purchases for much of the first half of 2020, which pushed net foreign currency purchases to $ 64 billion – or 2.4% of GDP – in the four quarters through June 2020.

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