Context:

The US has put India on its “monitoring list” of currency manipulating countries for the third time.

About:

• The US Treasury Department’s semi-annual report on the macroeconomic and foreign exchange policies list countries manipulating their currency’s exchange rate.
• The list also includes China, Korea, Japan, Italy, Singapore, Germany, Thailand, Malaysia, and Taiwan.

Currency Manipulation

• Currency manipulation refers to a process defined by the USDT for countries that engage in unfair currency practices to gain a trade advantage.
• It is an attempt made by a country’s central bank to decrease the value of their currency with respect to foreign currency exchange rates, the dollar, in this case.
• To weaken its currency, a country sells its currency and buys foreign currency—usually USD. This results in weak demand for the local currency and increased demand for US dollars.  The US Treasury Department uses three benchmarks to judge whether a country has manipulated its currency:
  • A bilateral trade surplus with the US of more than $20 billion
  • A current account surplus of at least 3 percent of GDP
  • Net purchases of foreign currency of 2 percent of GDP over 12 months.
• India was added to the list because it meets two of the three criteria laid down by the US Treasury.
• Bilateral trade surplus: As per the recent USDT report, India had a trade surplus with the US worth $22 billion in the four quarters through June 2020.
• Current account surplus: India’s first four-quarter current account surplus was 0.4 percent of GDP.
• Net purchases of foreign currency: Further, India’s net purchases of foreign currency stood at 2.4 percent of GDP. India increased its purchases of foreign currency as portfolio flows surged in the second half of 2020.