India's removal from US currency monitoring list is significant; here's why

The US Department of Treasury has removed India from its currency monitoring list of major trading partners. In its biannual report to Congress, the Department announced that Italy, Mexico, Vietnam and Thailand have also been removed from the list.

A country on the US’ currency monitoring list is considered a ‘currency manipulator’, a designation applied by US government to countries that engage in “unfair currency practices” for a trade advantage.

Putting a country in the list would mean that the country is artificially lowering the value of its currency to gain an unfair advantage over others.

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Why India was on list

The US treasury department had placed India on a watchlist of currency manipulators on account of its significant bilateral trade surplus.

This was the third time since the start of the pandemic that India figured on the list.

China, Japan, Korea, Germany, Malaysia, Singapore and Taiwan are the seven economies that are still part of the current monitoring list.

Three criteria

A country that meets two of the three criteria in the US’ Trade Facilitation and Trade Enforcement Act of 2015 is put under the currency monitoring list. The three criteria are: a “significant” bilateral trade surplus with the US — at least $20 billion in 12 months; a material current account surplus equivalent to at least 2 per cent of GDP over a 12-month period; and, “persistent”, one-sided intervention, when net purchases of foreign currency totalling at least 2 per cent of the country’s GDP over a 12-month period are conducted repeatedly, in at least six out of 12 months.

Once on the list, an economy will remain there for at least two consecutive reports so that the Treasury can assess whether any improvements in performance is durable and not due to temporary factors.

India and four other countries were removed from the Monitoring List as they now only met one of the three criteria for two consecutive reports.

Good news for RBI

In this report, the US treasury department reviewed and assessed the policies of major US trading partners, comprising roughly 80 per cent of US foreign trade in goods and services, during the four quarters through June 2022.

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The US decision means that the Reserve Bank of India can now take robust measures to manage the exchange rates effectively, without being tagged as a currency manipulator. To manage exchange rates amid the rupee fall, the RBI recently took actions like buying dollars at the time of excess inflows and selling dollars at the time of outflows.