USA Removes India From Its Currency Monitoring List: All You Should Know

The Indian Rupee has been falling at a constant rate recently which has a cascading impact on the Indian as well as global economy. The USA recognises this and is doing its bit, which is beneficial for them as well.

What happened?

Whenever there is a fluctuation in the Rupee price, it has an impact on imports and exports. We can export more with a weak Rupee, which is not good news for the USA. The country does not want India to devalue its currency either. Following this sentiment, they have brought out a ‘currency monitoring list’, which is also called a currency manipulator. Any country that makes a spot on the list has the dubious distinction of a ‘currency manipulator', usually devaluing their currency to increase their export. However, the US Department of Treasury has removed India from its ‘Currency Monitoring List', after two years. Along with India, they have also removed Mexico, Vietnam, Italy, and Thailand. Countries like Japan, China, Korea, Germany, Malaysia, Taiwan, and Singapore are the seven economies still on the list.

How does the report work?

The US treasury department reviewed and assessed the policies of major US trading partners, which include about 80 per cent of US foreign trade in goods and services. The assessment spans four quarters across June 2022. Once a country makes it to the list, they stay there for two consecutive report terms. Given that the report comes once every six months, there is a one-year guarantee of staying on the report at least. India was added to the list first time in December 2018, and the second time in December 2020.

The term ‘currency manipulation' in the report basically means devaluing your currency against the US Dollar so as to promote exports. It will reduce the cost of export from the host country and artificially reduce their trade deficits as a result. The US Treasury Department uses this criterion to assess whether an economy has been manipulated or not.

There are primarily three criteria, out of which the said economy has to fulfill any two to earn the dubious distinction of being on the list:

1. Current account surplus of at least three per cent of Gross Domestic Product (GDP), which include physical goods and services (this is one if two lists in India's balance if payments, other is capital goods). India is usually in a deficit with respect to trade and this criteria is hardly ever met.

2. Bilateral trade surplus with USA is over USD 20 Billion. While the bilateral trade between USA  and India is USD 102 Bn, the latter's trade deficit stands at USD 45.5 Billion.

3. Net purchases of foreign currency of two per cent of GDP over 12 months. India does fulfil this criteria, which has been close to five per cent of GDP. This has happened due to large capital inflows.

As we can see, India meets only one of the three criteria and is consequently removed from the list. Many economists are of the view that this list is devoid of logic. However, now RBI can take the requisite steps to manage exchange rates now that India is outside the list. It is also good news for India's global reputation.