GS PAPER III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: Commerce Secretary questioned the rationale behind the U.S. government’s decision to put India in the watchlist for currency manipulators and consider it as an intrusion into the policy space needed by central banks around the world to meet their mandates.

What is the issue?

• The U.S. Treasury Department had recently retained India in a watchlist for currency manipulators, citing higher dollar purchases (close to 5% of the gross domestic product) by the Reserve Bank of India (RBI).
• Another trigger for the inclusion in the currency watchlist is a trade surplus of $20 billion or more.
• India’s trade surplus with the U.S. grew by about $5 billion to $23 billion in 2020-21 from around $18 billion in the previous fiscal year.

India’s stand:

• RBI has been taking necessary steps to maintain stability in the financial markets and not accumulating forex reserves like China did in the past.
• Central bank’s activity in the foreign exchange market has been perfectly balanced and completely legitimate within the accepted monetary policy mandate of central banks across the world.
• It is a mandate of the central bank to provide stability in the currency as a result of which central banks buy and sell foreign currency.

Currency manipulator

• Currency manipulator is a designation applied by United States government authorities, such as the United States Department of the Treasury, to countries that engage in what is called “unfair currency practices” that give them a trade advantage.
• The US Treasury Department uses three criteria to assess whether an economy has manipulated its currency or not:

> Bilateral trade surplus with the US of more than $20 billion

> Current account surplus of at least 3 percent of Gross Domestic Product (GDP)

> Net purchases of foreign currency of 2 percent of GDP over 12 months.

• A designated currency manipulator can be excluded from U.S. government procurement contracts.

https://www.thehindu.com/business/Economy/us-currency-watchlist-an-intrusion-official/article34369954.ece

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