Wilful manipulator? No.

The US Treasury, by including India among the list of trading partners whose currency and macroeconomic policies need close monitoring, is being rather unreasonable. The RBI is only cleaning up the mess that has been created by the US Federal Reserve and other central banks. It is well established that the large stimulus by central banks in advanced economies results in heightened capital flows into emerging markets such as India, causing asset price inflation as well as stronger local currencies. Central banks in emerging economies cannot be faulted for taking the required actions to maintain currency-rate stability, which is important for domestic businesses. While it’s true that the RBI has mopped up copious amount of dollars in recent times, the intention was not to boost trade by deflating the currency, but to prevent a large one-sided appreciation in the rupee.

That said, the US Treasury’s sabre rattling need not worry RBI much. In its December report, only Vietnam and Switzerland had been named currency manipulators due to continuous one-sided intervention in the currency market, a material current account surplus equal to at least 2 per cent of GDP over 12-month period and a significant bilateral trade surplus with the US. India is on the watch-list for meeting a few of the criteria. The Treasury includes any trading partner that accounts for a large and disproportionate share of the US trade deficit, even if that country does not meet other criteria. The list, therefore, appears to be more of a warning to countries that the US is keeping a close watch on their policies. With inclusion in the list not entailing penal action, it need not affect India’s policies in any way.

As acknowledged in the report, it was due to the slower recovery in India when compared to its trading partners that the economy recorded its first four-quarter current account surplus since 2004 at 0.4 per cent of GDP over the year to June 2020. India has also maintained a bilateral goods trade surplus with US of $22 billion in the four quarters to June 2020. This coupled with the RBI’s net purchases of foreign exchange valued at $64 billion, or 2.4 per cent of GDP, in the four quarters to June 2020, seems to be the reason why India has been brought back to the currency manipulator watch-list. Given the extraordinarily high foreign portfolio and foreign direct investment flows into India, the RBI had its job cut out in maintaining rupee stability. The rupee, in fact, appreciated almost 6 per cent between April and August. Given the relatively favourable prospects of the domestic-consumption led Indian economy, foreign portfolio investors have been favouring India and China, while pulling out of other emerging economies. These flows had to be sterilised. Currency stability is important and the central bank should stay its course in this matter.

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