IC Markets

India Being Vulnerable over Currency Manipulation by the US

IndiaThe financial analysts have issued warning that sustained intervention by Reserve Bank of India in FX market could result in the United States considering India as a manipulator of currency.

The Congress on International Economic and Exchange Rate Policies receives a semi-annual report from the United States. The report includes currency policies adaption by the top trading partners of the company.

The report is prepared by the treasury department of the country, and the next release is likely to be submitted in October.

The issue has received a lot of importance in the light of United States of America’s President Donald Trump’s statement that their country would not tolerate unfair trade practices like for instance currency manipulation. One of the electoral promises of the President was to tackle China which is labelled as a currency manipulator.

CNBC International

The analysts with Edelweiss Securities issued the following statement:

We note that RBI’s intervention is not without repercussions and apart from direct monetary cost, sustained interventions has also brought India close to entering US watch list for currency manipulation.

The analysts with Edelweiss Securities have pointed out that India at the moment only fulfils two out of three conditions named by the United States for countries that are labelled as the currency manipulator. The three criteria comprise of the following: the bilateral trade surplus of the trading partner with the USA should not be less than $30 million. The current surplus at the moment is at 3% minimum of total GDP and continued one-sided intervention that includes foreign currency purchase which is equal to 2% of the gross domestic product of the country over a period of 12 months.

As per Edelweiss Securities analysts, Indi a can fulfil only the first and third condition, though noting that amount of RBI intervention has not fully reached 2% of the gross domestic product, through Reserve Bank of India has done an intervention in the eight months of last one year. At the moment, the trade surplus of India with the United States is approximately $23 billion.

India’s central bank is taking steps to stop its currency appreciation after a sharp jump in foreign inflows into debt and equity market. The FII or Foreign Institutional Investors in 2017 have invested $7.12 billion in equity and $19.50 million in debt market while the Indian currency can gain 6.08 percent.

When Reserve Bank of India buys dollars in the market, the rupee supply increases which in turn lead to liquidity in the market. For countering this effect, the central bank has also been entering into the forward contracts. The latest data from RBI shows that purchase of dollar through settlements are near the figure of $17 billion. As per the central bank, it can curb the rupee volatility by foreign exchange intervention. 

Steven Rudford

Steven Rudford

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IC Markets

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