Editorial

Wrong listing

| Updated on April 27, 2021

The RBI will have to support the government’s massive borrowing programme in FY22   -  PAUL NORONHA

The RBI must ignore the US action and continue with its efforts to maintain rupee stability

The decision of the US Department of Treasury to include India in the currency manipulator’s list in its April 2021 report need not weigh too heavily with the RBI. The report examines the macroeconomic and foreign exchange policies of major trading partners of the US, to find out if any of them is manipulating its currency to expand the trade balance with the US. With the current account deficit of the US expanding to 3.5 per cent of GDP in the fourth quarter of 2020, the largest as a share of GDP since the last quarter of 2008, it is not surprising that the country would try to apply pressure on its trading partners. It has identified five countries — Vietnam, Switzerland, Taiwan, India and Singapore — as currency manipulators.

However, the grounds on which India is being labelled a manipulator are very weak. The US Treasury identifies currency manipulators based on three factors — one-sided intervention in the foreign exchange market with the purchases amounting to at least 2 per cent of the country’s GDP, current account surplus of at least 2 per cent of GDP over a 12-month period and a material trade surplus with the US of at least $20 billion over a 12-month period. India’s current account registered a surplus of 1.3 per cent of GDP in 2020, but it was mainly due to falling demand leading to contraction in imports and falling crude oil prices. India has always had a trade surplus with the US and therefore the surplus in goods trade with the US in 2020 at $24 billion is not out of the ordinary. Yes, the RBI had to persistently purchase dollars through 2020, resulting in total purchases of $131 billion. But to believe that these purchases were intended to help exporters is baseless. The purchases were mainly because the large stimulus announcements by global central banks resulted in copious foreign portfolio and FDI flows into the country. The RBI was forced to buy the dollars flooding the country, though it was inflationary and the return on dollar denominated securities was very poor. The RBI therefore need not pay much heed to the US Treasury report.

Going ahead, it’s quite likely that India will be out of this list. This is because the RBI has halted its dollar purchases in the spot market since February, shifting its interventions to the rupee forward market instead. With the RBI having to support the Centre’s large borrowing programme in FY22 through purchases of Indian government bonds, the room to purchase dollar denominated securities is limited. The Indian currency is likely to drift with a downward bias over the coming months as the foreign capital flows are likely to be lower, at least until the second wave of Covid is contained. The weakness in the dollar is the only factor conducive to the Indian currency at this juncture.

Published on April 27, 2021

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