From UPSC perspective, the following things are important :
Prelims level : Currency Manipulation
Mains level : Read the attached story
The United States’ Department of Treasury has removed India from its Currency Monitoring List. India had been on the list for the last two years for alleged manipulation of Rupee.
What is Currency Manipulation?
- Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective.
- It is a designation applied by the US Department of the Treasury, to countries that engage in what is called “unfair currency practices” that give them a trade advantage.
- The typical claim – often doubtful – is that countries manipulate their currencies in order to make their exports effectively cheaper on the world market and in turn make imports more expensive.
Why do countries manipulate their currencies?
- In general, countries prefer their currency to be weak because it makes them more competitive on the international trade front.
- A lower currency makes a country’s exports more attractive because they are cheaper on the international market.
- For example, a weak Rupee makes Indian exports less expensive for offshore buyers.
- Secondly, by boosting exports, a country can use a lower currency to shrink its trade deficit.
- Finally, a weaker currency alleviates pressure on a country’s sovereign debt obligations.
- After issuing offshore debt, a country will make payments, and as these payments are denominated in the offshore currency, a weak local currency effectively decreases these debt payments.
US treasury’s criteria for currency monitoring
To be labelled a manipulator by the U.S. Treasury:
- Countries must at least have a $20 billion-plus bilateral trade surplus with the US
- foreign currency intervention exceeding 2% of GDP and a global current account surplus exceeding 2% of GDP
Which are the countries under this list?
- China, Japan, Korea, Germany, Malaysia, Singapore, and Taiwan are the seven economies that are a part of the current Currency Monitoring List.
- China’s failure to publish foreign exchange intervention and broader lack of transparency around key features of its exchange rate mechanism.