From UPSC perspective, the following things are important :
Prelims level : Currency Manipulation
Mains level : Impact of Currency Manipulation
India is one of the 11 countries on the US Treasury’s ‘Monitoring List’ with regard to their currency practices for the first time in the Biden administration.
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.
- 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
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
Implications for India
- India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other.
- India being on the watch list could restrict the RBI in the foreign exchange operations it needs to pursue to protect financial stability.
- This comes when global capital flows threaten to overwhelm domestic monetary policy.
- The two most obvious consequences could be an appreciating rupee as well as excess liquidity that messes with the interest rate policy of the RBI.
- Indian policymakers have to be sensitive to the unpredictable nature of policy-making in the US under Trump, especially concerning global trade.