How a country gets a currency manipulator tag

Treasury secretary Steven Mnuchin has said that the US is open to changing how it determines which nations are gaming their currencies. Mint gives the lowdown on the currency manipulation list prepared by the US and where India stands with respect to it.

What is currency manipulation and who determines it?

The US Department of the Treasury publishes a semi-annual report in which the developments in global economic and exchange rate policies are reviewed. If a US trade partner meets three assessment criteria, the US labels it a currency manipulator. The US then tries to solve it via bilateral talks. The October report of the Treasury says that it continues to press major trading partners that have maintained large, persistent external surpluses to support stronger and more balanced global growth by facilitating domestic demand growth as the primary engine for economic expansion.

How are countries identified for the currency manipulation list?

The US Treasury has established thresholds for the three criteria. First, a significant bilateral trade surplus with the US is one that is at least $20 billion; second, a material current account surplus is one that is at least 3% of GDP; and third, persistent, one-sided intervention reflected in repeated net purchases of foreign currency and total at least 2% of an economy’s GDP over a year. The Treasury’s goal is to focus attention on those nations whose bilateral trade is most significant to the US economy and whose policies are the most material for the global economy.

How are currencies on the watch list faring in 2018?

Such currencies have been falling against the dollar. Japan’s yen fell 0.13%, South Korea’s won slipped 5.13%, Switzerland’s Swiss Franc fell 2.3% and China’s yuan dropped 6.3%.

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Does India feature on the currency manipulation list?

The US Treasury, in its report, said no major trading partner met the criteria to be designated as manipulating its currency. It has kept India, China, Japan, South Korea, Germany and Switzerland on the monitoring list. It said that India’s circumstances have shifted markedly, as the central bank’s net sales of forex over the first six months of 2018 led net purchases over the four quarters through June 2018 to fall to $4 billion, or 0.2% of GDP. The rupee has depreciated by 13.05% this fiscal.

Do policymakers in India need to worry?

Economists say India doesn’t need to worry as it only meets one of the three criteria. “If this remains the case at the time of its next report, Treasury would remove India from the Monitoring List,” the report said. Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research, said India being on the watch list was not important. “If we were to be labelled as manipulators, there would have been pressure on India to reduce tariffs,” he said. “… that is going away now.”

source: livemint


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