US adds India to the currency practices and macroeconomic policies monitoring list

The US Department of Treasury has included India in the monitoring list of its major trading partners that merit close attention to their currency practices and macroeconomic policies. The list was part of semi-annual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.

Key Facts

The US Treasury Department report is required by Congress to identify countries that are trying to artificially manage value of their currency to gain trade advantage, for example by keeping exchange rate low to promote cheaper exports. It uses three parameters to determine currency manipulator: Bilateral trade surplus with US to be $20 billion, current account surplus at 3% of country’s GDP, and net purchases of foreign currency to 2% of country’s GDP over a year.
Once country is listed, it remains on it for at least two consecutive report cycles which is submitted to US Congress to help ensure that any improvement in performance versus criteria is durable and is not due to temporary factors. India is sixth addition to the watch list which comprises China, Japan, South Korea, Germany and Switzerland.  US Treasury Department has asked these countries to implement economic reforms to manage their respective surpluses.

Reasons for India’s inclusion

According to USDTR, India increased its purchase of forex over first three quarters of 2017. Despite sharp drop-off in purchase in fourth quarter, net annual purchase of forex reached US $56 billion in 2017, equivalent to 2.2% of the GDP. The pick-up in purchases came amidst relatively strong foreign inflows, both of foreign direct investment (FDI) and portfolio investment (FPI).  Notwithstanding increase in intervention, the rupee appreciated by more than 6%  against the dollar and by more than 3% on a real effective basis in 2017.

Month: Current Affairs - April, 2018