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Sunday, October 2, 2022

Is currency manipulation justified?

Currency manipulation happens when a country’s central bank intervenes in foreign exchange rates by buying or selling dollars/euros to create artificial scarcity of dollars/euro in forex markets thereby causing weakening of local currency to boost the country’s exports. The US treasury labels a country as a currency manipulator or puts the country in currency manipulator watch list, if it engages in unfair currency activity to get trade advantage.

Bharat was first included in the currency manipulator watch list in October 2018 but was removed from the list that came out in May 2019. Bharat is back on US Treasury’s currency manipulator watch list for second time in December 2020. There are 11 economies that are currently in the monitoring watch list – China, Japan, South Korea, Germany, Ireland, Bharat, Mexico, Italy, Malaysia, Singapore and Thailand

In Bharat, the experts opine that US currency manipulation criteria could interfere with Bharat’s economic policies.

In Bharat, RBI intervenes to reduce the exchange rate volatility and does not accumulate reserves. Considering the daily volatility in exchange rates, impact the companies’ earnings and does not allow them to do their business smoothly.

RBI ensures that sufficient foreign exchange reserves are built to cushion and provide import cover in case of any worst economic circumstances. Currently Bharat’s foreign exchange reserves are worth US$581 billion ranked 4th after China, Japan and Switzerland. It is indispensable that RBI also manages the foreign exchange reserves.

RBI intervenes in exchange rates to ensure that currency should neither be overvalued nor undervalued as both on extreme side have their own repercussions on the overall economy hampering growth.

Source – investing.com

The value of currency increases over time based on higher incomes, more purchasing power and more demand for imported goods increases demand for foreign currencies and thus weakens the domestic currency. The growth rate, employment, interest rates, investment, consumer spending, exports, inflation, FII and FPI inflows, debt, macroeconomic policies based on geopolitical conditions, credit growth and forex reserves all drive the economy forward.

Evaluation criteria in April 2021

Country Forex intervention
Net Purchases            >=  2%of GDP
Current Account Surplus >= 2% of GDP Bilateral Trade with US >= US$20 billion Enhanced Engagement Manipulator Watch List
Singapore 28.3 17.6 4 C
Switzerland 15.3 3.7 57 C
Taiwan 5.8 14.1 30 C
Bharat 5 1.3 24 C
Vietnam 4.4 3.7 70 C
Thailand 1.9 3.2 26 C
China 1.2 1.9 311 C
Malaysia 0.6 4.4 32 C
South Korea 0.3 4.6 25 C
Japan 0 3.3 55 C
Mexico -0.2 2.4 113 C
Germany 6.9 57 C
Ireland 4.8 56 C
Italy 3.7 30 C

Source – https://en.wikipedia.org/wiki/Currency_manipulator

US Treasury as per US 2015 trade law states that Bharat has intervened in the foreign exchange market in a sustained and asymmetric manner to devalue its currency and breached under 2 out of 3 criteria hence been included in the watch list. Bharat-US goods trade surplus stands at $24 billion in 2020 and their services trade surplus stands at $8 billion in 2020. Bharat’s current account surplus is at 1.3% of GDP. Net purchases of foreign currency is 5% of GDP at $131 billion breaching well above the threshold of 2% of GDP.

US lifts Vietnam, Switzerland and Taiwan from watch list and shifts under enhanced engagement category.

Bharat would however continue to intervene in foreign exchange rates to control the volatility in the currency market as long as buying and selling foreign currency is kept fairly steady to keep Bharat markets stable and of course not being labelled under watch list for a long time as it may tarnish Bharat’s repute.

(Featured image source: boomlive.in)

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Criti Mahajan
Criti Mahajan
An MBA graduate in finance with 5 years of working experience in the financial services space. An enthusiastic research writer inclined towards understanding economics and policy making with an experience of diversified writing on professional platforms in economics. A self-starter, perseverant and an ardent learner.


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