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No currency manipulator: India’s central bank intervened only to smoothen out volatilities.

Date: 26-04-2021
Subject: No currency manipulator: India’s central bank intervened only to smoothen out volatilities
The intention is never to peg the value of the local currency at any specific level.

The US treasury department’s decision to retain India on its watchlist of currency manipulators is unfair. The Biden administration has said that over the four quarters through December 2020, five major US trading partners—Vietnam, Switzerland, Taiwan, India and Singapore—intervened in the foreign exchange market in a “sustained, asymmetric manner with the effect of weakening their currencies”. In reality, India’s central bank follows a non-interventionist policy, stepping into the currency market only to smoothen out volatilities; the intention is never to peg the value of the local currency at any specific level.

In fact, the US Fed’s extra accommodative monetary policies, aimed at keeping interest rates low, and boosting the US economy, have prompted investors to move money into emerging markets in search of better returns. The deluge of dollars—as foreign portfolio investors were investing large amounts in the equities markets—ensured the rupee remained strong for close to a year; it wasn’t export earnings that were bringing in the dollars. The strength of the currency was, in effect, hurting our exporters making them uncompetitive. That trend has since reversed, and the inflows into the equity markets in April so far have been negative, with the second wave of the pandemic proving to be a severe one. The rupee has dropped to below-75 levels now against the dollar.

A currency manipulator is judged on three criteria: the country must have a significant bilateral surplus, with the US, of over $ 20 billion over a 12-month period, a current account surplus of at least 3% of GDP and should have made net purchases of foreign currency of 2% of GDP over a 12-month period. India’s current account surplus is well below 3% of GDP; the surplus is a small one and temporary at best. India has almost always run a current account deficit, at times a large one. The bilateral surplus too was slightly bigger than $20 billion in 2020.

The treasury department said Reserve Bank of India (RBI) purchased foreign exchange on net in 11 of the 12 months of 2020, with net intervention reaching $131 billion, or 5% of the GDP. RBI has, of course, been buying up dollars to bolster the foreign exchange reserves; it bought some $100 billion last year. It should not be criticised for this. A war-chest is necessary for a country like India, not simply to be able to fund imports but also to protect itself from a large and sudden outflow of dollars. After all, portfolio flows can be volatile. Although the US has labelled India a currency manipulator on more than one occasion—in December, 2018 and then again in December 2020 after being struck off the list in May 2019—no serious action has been taken. Hopefully, this time too, the US’s approach will remain the same.


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