The US Treasury Department last month added India to a list of countries that it considers as potential currency manipulators. This means that the US thinks that India probably manipulates the rupee-dollar exchange rates consciously. The country suspects that India consciously keeps the rupee weaker, an act which hurts US interests. India believes that this assumption by the US is wrong.
The Reserve Bank of India tries to stop rupee from getting stronger, however the same is done to stop unnecessary upheavals in the exchange rate. During many occasions when India receives Foreign Direct Investment or Foreign Institutional Investment, the supply of dollar increases suddenly, which could potentially make the Indian rupee stronger. On such occasions, the Reserve Bank of India does make purchases of the US dollar and prevents Indian rupee appreciation.
Why is the US then worried? The US Treasury Department feels that if the rupee weakens or in other words, the dollar gets stronger, America’s trade competitiveness may go down and therefore US imports may increase and exports may fall. Here, we have to note that the US has a huge trade deficit not only with China but also with India. The Trump administration doesn’t want this trade deficit to widen; it wants imports to decline and exports to increase. This they believe would increase their GDP and give a boost for employment in the US.
But what is the truth? The US may put any country on the watch list for being a currency manipulator based on three criteria. (i) The US has a trade deficit exceeding $20 billion with the country (ii) The central bank of the country purchases dollars in excess of 2 per cent of their GDP (iii) The country has a balance of payment surplus exceeding 3 per cent of the GDP. The first two criteria might have led the US government to put India on the currency manipulator watch list. India has a $23 billion trade surplus with the US and the RBI purchased US dollars to the tune of 2.2 per cent of the GDP last year. However the third criterion is not applicable to India. India has a huge balance of payment deficit (CAD), not a surplus. For the period 2017-2018, CAD has widened from last year.
It is possible that countries like China consciously depreciate their currency to boost exports and cut down on imports. That’s the reason why the US has a massive trade deficit with China ($375 billion). Today, India is receiving huge amounts of foreign investments, which anyway is not related to the valuation of currency. Naturally, if these foreign exchange receipts are allowed to flood the market, the rupee may artificially get very stronger. However since India has a huge trade deficit with the rest of the world, the rupee might not stay strong for long. In the period 2017-2018, India’s balance of trade deficit was $157 billion. Apart from this, India has to service its huge foreign debt for which it is imperative to keep sufficient foreign exchange reserves. This is the reason why India’s foreign exchange reserves reached $425 billion at the end of April second week.
Experts believe that this move by the US is incorrect as India’s balance of payment, compared to many countries, is much bigger. The US has also placed China on the same list. For many reasons it is believed that China is actually a currency manipulator and has huge trade surplus with the US. China also satisfies the third criterion for placing a country on the watch list while India doesn’t. China does have balance of payment surplus exceeding 3 per cent of their GDP. Experts also believe that if at all any country is kept on the list of currency manipulators by the US, it would most probably China, and in no way India. This is even more imminent in view of the ongoing trade war between the US and China.
However, we also need to find measures for stabilising our currency value. Despite all efforts, we see huge upheavals in the exchange rate in India. The major reason for this is the lack of stability in foreign institutional investment. On some occasions they bring huge amounts of foreign exchange and on other occasions they take it back. When foreign exchange comes to India, the rupee starts improving and to somehow curb this trend, the RBI purchases dollars. However when FIIs take their money back, the RBI does not make such interventions and therefore the rupee weakens.
This upheavals in exchange rate does not benefit the country, however speculators make huge money out of this. We need to stop this. We need to think of measures to regulate foreign institutional investors. To curb FIIs from taking their money back after profiteering, we can impose tax on their outflows. This is called ‘Tobin Tax’ in economics jargon. We can also impose a minimum time period of investment, or in other words ‘Lock in Period’ on FIIs.
Not only this, the RBI can also make a ‘Buffer Stock’ of foreign exchange to stop currency upheavals. When FIIs bring in dollars, the same can be put in the ‘Buffer Stock’, so that the value of rupee does not increase. However, when FIIs take their money back, the same can be withdrawn from this ‘Buffer Stock’. If we follow this process, the dollar supply and demand will not get affected by the FIIs’ activities and thus we can stop unnecessary upheavals in the exchange rate.
Ashwani Mahajan
National co-convenor, Swadeshi Jagran Manch and Associate Professor of Economics, University of Delhi
Email: ashwanimahajan@rediffmail.com