The United States treasury department has added India to the monitoring list of countries branded as currency manipulators, and asked New Delhi to allow the exchange rate to move to reflect economic fundamentals and limit foreign exchange intervention.
“Over the four quarters through June 2020, four major US trading partners — Vietnam, Switzerland, India, and Singapore — intervened in the foreign exchange market in a sustained, asymmetric manner,” the treasury department said.
It found that 10 economies warrant placement on its monitoring list of major trading partners that merit close attention to their currency practices: China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India, the last three being added in this edition of the report.
The treasury department in its report on trading partners said India met two of the three criteria, having a material current account surplus, and engaging in persistent, one-sided intervention over the reporting period. Treasury will closely monitor and assess the economic trends and foreign exchange policies of each of these economies.
The department said on India: “The authorities should allow the exchange rate to move to reflect economic fundamentals and limit foreign exchange intervention to circumstances of disorderly market conditions. India can also leverage the recovery period to pursue structural reforms that will open its market further to foreign investment and trade, including foreign portfolio investment in Indian sovereign and sub-sovereign bonds, thereby fostering stronger long-term growth.”
The report noted that the rupee has diverged somewhat from peer currencies, however, amid Reserve Bank of India (RBI) intervention.
While many emerging market currencies started to rebound from their March lows in May and June, the rupee remained relatively rangebound as the RBI resumed large foreign exchange purchases.
The rupee has appreciated somewhat since late August, but it has still not recovered as much lost ground as its emerging market peers have, the treasury department said.
In its August 2020 External Sector Report covering 2019, the International Monetary Fund assessed the real effective exchange rate to be in line with economic fundamentals.
India’s goods trade surplus with the United States was $22 billion for the four quarters through June 2020, broadly in line with its average level over the preceding five years.
India also ran a $5 billion services trade surplus with the US in 2019.
India’s exports to the US are concentrated in sectors that reflect India’s global specialization (notably diamonds, pharmaceuticals, and IT services), while US exports to India reflect India’s domestic needs (fuels, aircraft, higher education, and software).
“India has been exemplary in publishing its foreign exchange market intervention, publishing monthly spot purchases and sales and net forward activity with a two-month lag. The RBI states that the value of the rupee is broadly market-determined, with intervention used only to curb undue volatility in the exchange rate,” the treasury department said.
It said the RBI purchased foreign exchange on net in 10 of the 12 months through June 2020, with net intervention (both spot and forward intervention) reaching $64 billion, or 2.4 percent of GDP.
While purchases slowed during the onset of the pandemic, and the RBI engaged in net sales in March 2020, the RBI’s net purchases again accelerated in mid-2020 as portfolio inflows resumed and foreign direct investment remained strong.
Rupee volatility did not appear to have been particularly elevated in the four quarters through June 2020, however.
These purchases have led to a rapid rise in total reserves that are now well in excess of standard reserve adequacy benchmarks.
As of June 2020, foreign currency reserves stood at $466 billion, equal to 4.4 times gross short-term external debt.
Reserves have continued to grow in recent months, reaching $502 billion in September 2020 as purchases accelerated further in July and August.
By comparison, at end-2018, foreign currency reserves were valued at $370 billion, equal to 3.6 times gross short-term external debt. India also maintains ample reserves (163 percent of ARA metric in 2019) according to IMF metrics for reserve adequacy, particularly given that India maintains some capital controls.