The US on Wednesday added India along with Taiwan and Thailand to the "monitoring list" of currency manipulating countries that includes major trading partners like China and six others. It also branded Vietnam and Switzerland as currency manipulators.
Other countries in the monitoring list are Japan, South Korea, Germany, Italy, Singapore and Malaysia. Ireland has been removed from the Monitoring List, the US Department of Treasury said in its report Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States' submitted to the Congress on Wednesday.
Over the four quarters through June 2020, four major US trading partners Vietnam, Switzerland, India, and Singapore intervened in the foreign exchange market in a sustained, asymmetric manner, it said.
Vietnam and Switzerland exceeded the two other objective criteria established by Treasury to identify potentially unfair currency practices or excessive external imbalances, which could weigh on US growth or harm American workers and firms.
"The Treasury Department has taken a strong step today to safeguard economic growth and opportunity for American workers and businesses, said US Treasury Secretary Steven T. Mnuchin.
"Treasury will follow up on its findings with respect to Vietnam and Switzerland to work toward eliminating practices that create unfair advantages for foreign competitors, he said in a press release issued by the Treasury Department.
The Treasury found that 10 economies warrant placement on Treasury's "Monitoring List" of major trading partners that merit close attention to their currency practices: China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India, the last three being added in the report.
Based on Reserve Bank of India's regularly published intervention data, India's net purchases of foreign exchange accelerated notably in the second half of 2019, and following sales during the initial onset of the pandemic, India sustained net purchases for much of the first half of 2020, the report said.
This pushed net purchases of foreign exchange to USD 64 billion, or 2.4 per cent of GDP, over the four quarters through June 2020.
"Treasury continues to welcome India's long-standing transparency in publishing foreign exchange purchases and sales, the report said, adding that it encourages the authorities to limit foreign exchange intervention to periods of excessive volatility while allowing the rupee to adjust based on economic fundamentals.
"By further opening the economy to foreign investors, India can also support economic recovery and bolster long-term growth, said the report.
According to the Treasury, India's economy contracted sharply in the first half of 2020 due to the collapse in domestic demand brought on by the COVID-19 pandemic. The authorities responded with modest direct fiscal support of around two per cent of GDP and substantial monetary easing.
India's deep domestic demand contraction and slower recovery relative to its key trading partners contributed to the economy's first four-quarter current account surplus since 2004 (0.4 per cent of GDP over the year to June 2020).
India for several years has maintained a significant bilateral goods trade surplus with the United States, which totalled USD 22 billion in the four quarters through June 2020, it said.
The Treasury said that India has been exemplary in publishing its foreign exchange market intervention, publishing monthly spot purchases and sales and net forward activity with a two-month lag. The RBI states that the value of the rupee is broadly market-determined, with intervention used only to curb undue volatility in the exchange rate.
The RBI purchased foreign exchange on net in 10 of the 12 months through June 2020, with net intervention (both spot and forward intervention) reaching USD 64 billion, or 2.4 per cent of GDP. While purchases slowed during the onset of the pandemic, and the RBI engaged in net sales in March 2020, the RBI's net purchases again accelerated in mid-2020 as portfolio inflows resumed and foreign direct investment remained strong.
"Rupee volatility did not appear to have been particularly elevated in the four quarters through June 2020, however. These purchases have led to a rapid rise in total reserves that are now well in excess of standard reserve adequacy benchmarks. As of June 2020, foreign currency reserves stood at USD 466 billion, equal to 4.4 times gross short-term external debt. Reserves have continued to grow in recent months, reaching USD502 billion in September 2020 as purchases accelerated further in July and August, it said.
The Treasury said that Indian authorities should allow the exchange rate to move to reflect economic fundamentals and limit foreign exchange intervention to circumstances of disorderly market conditions.
It said India can also leverage the recovery period to pursue structural reforms that will open its market further to foreign investment and trade, including foreign portfolio investment in Indian sovereign and sub-sovereign bonds, thereby fostering stronger long-term growth.