Explained | US adds India to currency manipulator watchlist: What does it mean?

The US Treasury Department uses three criteria to assess whether an economy has manipulated its currency or not

The United States has retained India among many other countries on its currency manipulation watchlist.

India was added to the list for a second time in December 2020. It was first added to the list in December 2018, and later removed in 2019.

The US Treasury Department's report said 11 economies warrant placement on "Monitoring List" of major trading partners - China, Japan, South Korea, Germany, Ireland, Italy, India, Malaysia, Singapore, Thailand, and Mexico. Except Ireland and Mexico, all the other countries were in the December 2020 list as well.

Vietnam, Switzerland and Taiwan tripped the department's thresholds for possible currency manipulation under a 2015 US trade law, but it did not formally give such a label to the economies.

Also read: How to read India's comeback into the US Treasury's currency manipulator watch list

How does the US Treasury determine currency manipulation?

The US Treasury Department uses three criteria to assess whether an economy has manipulated its currency or not:

> Bilateral trade surplus with the US of more than $20 billion

> Current account surplus of at least 3 percent of Gross Domestic Product (GDP)

> Net purchases of foreign currency of 2 percent of GDP over 12 months.

What did the US treasury say about India?

"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," according to the report released on April 16.

India meets two out of the three criteria above-mentioned criteria.

"While the RBI frequently intervenes in both directions, RBI purchased foreign exchange on net in 11 of the 12 months of 2020, with net intervention reaching $131 billion, or 5 percent of GDP," The report said.

India's current account registered a surplus of 1.3 percent of GDP 2020, a shift from the consistent current account deficits recorded since 2004, the US Treasury Department said.

India's goods trade surplus with the United States was $24 billion in 2020, as per the report. India also ran an $8 billion services trade surplus with the United States in 2020.

"The authorities should allow the exchange rate to move to reflect economic fundamentals, limit foreign exchange intervention to circumstances of disorderly market conditions, and refrain from excessive reserve accumulation" the report said.