Is India by any stretch of imagination a currency manipulator? By placing India on its currency watch list, the US Treasury has taken action that can only be described as ‘unwarranted’. The US has a history of ‘strong arm tactics’ in managing its economic and trade relations with the best of its partners. Regardless of whether Democrats or Republicans occupy the White House, the paranoia of the US seems all-pervasive. If the free market economy is to prevail, open, flexible and mutually beneficial currency policies will have to be pursued by both the US and India. Setting aside this basic tenet, Washington’s rigid fixation on conspiracy theories seems to have forced both the political establishment and the US Treasury to including India on the ‘currency watch list’ that is reviewed every six months.
The others on the US watch list for being currency manipulators are China, Japan, Germany, South Korea and Switzerland. Most surprising is that all three major Asian allies — Japan, South Korea and now India — have been included in the currency watch list. Why did India make it to the US ‘currency watch list’? According to Washington, the Reserve Bank of India went in for US currency purchases of $42 billion during June 2016-July 2017 that account for 1.8 per cent of GDP. US Treasury stipulates that a currency is to be put on the watch list if purchases of the greenback are two per cent of GDP and above. Right now, India has crossed this limit and hence the inclusion in the watch list. India also met another criterion for being on the watch because its trade surplus with the US crossed $ 20 billion – it marginally surpassed the benchmark with its $23 billion trade surplus. What is perhaps absurd is the bracketing of India with China whose trade surplus with the US during the past 12 months was a massive $375 billion, which has now triggered a trade war between Beijing and Washington. The inclusion in the US currency watch list has some consequences for India. For one, RBI’s flexibility to intervene in the currency market becomes a little limited. In the wake of sustained capital inflows, the rupee is bound to gain strength which is likely to make India’s exports non-competitive in tight market conditions. Hence, RBI will have to find a way to deftly manage rupee value as against the US dollar. Given the ‘ultra nationalist’ agenda tag of President Donald Trump, the US Treasury may not be willing to see reason from the long term trade and investment perspective. Secondly, over $450 billion reserves that India holds lend a sense of comfort and reassurance to the country’s trading and investment partners on economic and development policy goals to emerge as a significant player globally. Thirdly, RBI under Governor Urjit Patel will have to diversify the country’s currency reserves basket to twiddle a thumb at US Treasury that trade, investment and currency relations cannot be a one-way street. Given that over 70 per cent reserves were held in US dollars, it is time for moving on to other currencies and also diversify the related exchange risks.
Fourthly, this also means, India will have to diversify its trade basket moving away from US-centric trade, especially in goods. Tapping large trade and investment potential in European markets, UK, African and Latin American geographies may have to be prioritised as a policy alternative. Fifthly, the Indian government and RBI will have to ‘try and put some sense’ into US Treasury through negotiations for not meddling with rupee policy albeit indirectly. A few months back, attempts were made to place India on the US 301 priority watch list to intimidate Indian traders of imminent non-tariff trade restrictions. In the past, placing India on the 301 list had boomeranged on the American establishment. Product and process related intellectual property regimes are on mutually agreed points and not unilateral. If non-tariff trade barriers have not worked, will US contemplating currency-related measures work? Donald Trump and the US Treasury will have to think aloud logically.