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India Risks Getting Rapped By The US Over Currency Manipulation

Financial analysts have warned that sustained intervention by India’s central bank in the foreign exchange market could result in the United States deeming India as a currency manipulator.

The United States issues a semi-annual report to the Congress on International Economic and Exchange Rate Policies which includes assessments of the currency policies adopted by the country’s top trading partners.

Prepared by the country’s the treasury department, the next report for the year is expected in October.

The issue has gained importance in light of U.S. President Donald Trump’s statements that the U.S. was no longer willing to put up with unfair trade practices like currency manipulation. One of his electoral promises was to tackle China which he labeled as a currency manipulator.

CNBC International

In a statement, analysts with Edelweiss Securities said

We note that RBI’s intervention is not without repercussions and apart from direct monetary cost, sustained interventions has also brought India close to entering US watch list for currency manipulation

Edelweiss analysts have pointed out that India currently fulfils two of the three conditions named by the U.S. for labeling countries as currency manipulators. The three criteria are: the trading partner’s bilateral trade surplus with the U.S. must be a minimum of $30 million, the current account surplus is at the minimum 3 percent of the total GDP and continued one-sided intervention involving purchase of foreign currency which totals to at least 2 percent of the country’s GDP over a period of a year.

According to Edelweiss, India fulfils the first and the third condition, though noting that the amount of RBI intervention has so far not reach 2 percent of GDP, though the central bank has intervened in eight of the past 12 months. India’s trade surplus with the U.S. is around $23 billion currently.

A sharp jump in foreign inflows into the debt and equity market has led to the RBI taking steps to stop the appreciation in the rupee. This year alone foreign institutional investors (FIIs) have so invested $7.12 billion into equity and $19.50 billion into debt markets, while the rupee has gained 6.08 percent.

When RBI purchases dollars in the market, it increases the rupee supply which adds to overall liquidity. In order to counter it, the RBI has also been entering into forward contracts. Latest RBI data show that dollar purchases via contracts are nearly at $17 billion. According to the RBI, it intervenes in the foreign exchange market only to curb volatility in the rupee.

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