What’s in the news?

• The United States has once again included India in its monitoring list of countries with potentially “questionable foreign exchange policies” and “currency manipulation”. 
• India was last included in the currency watchlist in October 2018, but removed from the list that came out in May 2019.

What does the term ‘currency manipulator’ mean?

• • This is a label given by the US government to countries it feels are engaging in “unfair currency practices” by deliberately devaluing their currency against the dollar. 

• Devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies.

• 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 artificially show a reduction in trade deficits as a result.

Why is India back in the Monitoring List again?

• The U.S. Treasury uses three benchmarks to judge currency manipulators:
  • A bilateral trade surplus with the U.S. of more than $20 billion.
  • A current account surplus of at least 3% of GDP.
  • Net purchases of foreign currency of 2% of GDP over a 12-month period.
• India breached the first and the third benchmarks.

• India, which has for several years maintained a significant bilateral goods trade surplus with the US, crossed the $20 billion mark, according to the latest report. Bilateral goods trade surplus totalled $22 billion in the first four quarters through June 2020.
• The U.S. has included India in the list after the Indian central bank stepped up purchases of foreign currency as portfolio flows surged in the second half of the year.

Effect on Indian Economy

• The designation of a country as a currency manipulator does not immediately attract any penalties, but tends to dent the confidence about a country in the global financial markets.

Reference:

1. https://indianexpress.com/article/explained/currency-manipulation-explained-india-us-currency-watchlist-7108379/