Making sense of the currency manipulator tag
The Indian rupee is back on the US Treasury’s watchlist of countries manipulating currencies for the third time this year, prompted by the RBI’s unstoppable dollar purchases. Forex reserves touched an all-time high of $533 billion, strengthening the view that the RBI should let the rupee appreciate and reduce its forex intervention.
The US Treasury tracks three metrics: bilateral trade surplus, current account surplus of at least 2 per cent of GDP over a 12-month period and repeated dollar purchases, which India evidently breached. In the past eight months, the RBI bought a massive $57 billion in the spot market and another $12.6 billion in forward contracts, or 2.4 per cent of GDP. At this rate, capital inflows could cross $82 billion by March.
The abundant rupee liquidity and high inflation too warrant that the central bank ease its grip on dollar purchases, given that the rupee has been Asia’s worst performer. Some also believe that allowing rupee appreciation keeps imported inflation in check, even though forced rupee strengthening upsets market players. Moreover, a bulging forex kitty floods domestic money supply.
But India maintains that it was only managing capital inflows and given its sizable reserves and large current account deficit, the country shouldn’t be billed a currency manipulator. In sum, the RBI is trapped in a tough neighbourhood to manage liquidity, balance forex inflows, continue secondary bond market purchases to keep long-term borrowing costs low, and ensure money market rates and policy rates stay the course. It doesn’t sound easy, but one must admit it isn’t a dull job either.
The immediate task for RBI Governor Shaktikanta Das is to choose between targeting the exchange rate and domestic money supply, which already increased by Rs 4 lakh crore so far this fiscal. While he cracks it, Das must reinforce his remarks made last year calling for a greater understanding on the need for reserves rather than stigmatising countries with a manipulator tag. As he rightly asked then, why should labelling be a bilateral prerogative when a multilateral institutional architecture exists for the purpose?