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India removed from US currency watch list

Thu 30 May, 2019

Recently the US administration has dropped the names of India and Switzerland from its currency monitoring list. India and Switzerland were removed because for two consecutive reports they had both kept a significant bilateral surplus with the United States which is only one of three criteria necessary for exclusion on the monitoring list.

Background

  • For the first time, the US placed India in its currency monitoring list of countries in May 2018 with potentially questionable foreign exchange policies.
  • In its next report in October 2018, the Treasury had said that India has made improvements and its name would be removed from the currency manipulation list in the next report.

Significance

If any country is labelled as manipulators that country is pressurised to reduce tariffs.

Who is a ‘Currency manipulator’ and who determines it?

  • ·"Currency manipulator" is a term used to indicate countries that manipulate the rate of exchange for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.
  • ·It is also applied to countries that intervene in their own foreign exchange markets.
  • ·A country can intentionally undervalue its currency by selling its own currency to drive down its value, making its exports cheaper and more competitive.
  • The US Treasury has established thresholds for the three criteria :-
  • A significant bilateral trade surplus with the US is one that is at least $20 billion;
  • A material current account surplus is one that is at least 3% of GDP;
  • Persistent, one-sided intervention reflected in repeated net purchases of foreign currency and total at least 2% of an economy’s GDP over a year.