Why US may not keep India on currency monitoring list for too long

Sushmita Choudhury Agarwal   New Delhi     Last Updated: April 17, 2018  | 00:00 IST
Why US may not keep India on currency monitoring list for too long

Last week, the US Treasury Department included India in its currency monitoring list for the first time ever. Other countries already present on the list include China, Korea, Japan, Germany and Switzerland. According to Vinay Patel, who heads Asia Advisors, an independent financial advisory and research firm, being on the monitoring list implies that the US will engage with the country and persuade it to change its forex and macroeconomic policies in order to reduce the surplus and/or foreign currency intervention as the case may be. If the country does not, the President can impose more penalties and label a country as a currency manipulator.

The US Treasury uses three criteria to evaluate whether any country is to be put on the monitoring list:

  •     A significant bilateral trade surplus with the United States of more than $20 billion
  •     A material current account surplus of 3 per cent of GDP or more
  •     A persistent one-sided intervention in the foreign exchange market of at least 2 per cent of GDP and intervention period of 8 out of preceding 12 months

In a recent Smartkarma report, Asia Advisors pointed out that as India boasted a trade surplus above $20 billion with the US in 2017 and the country also intervened in forex markets to tune of $56 billion - or 2.2 per cent of GDP in the four quarters ending 2017 - we made it to the currency watch list.

"When a country meets all three criteria it is labelled as a currency manipulator. The ultimate threat of a country being so labelled as such is the threat of higher tariffs," says Patel, adding that, to date, only three countries have bagged that tag - Japan in 1988, Taiwan in 1988 and 1992 and China in 1992-94 - and none post-1994. Although the US has recently made noises about labelling China as a currency manipulator again, President Donald Trump has refrained from following through on the threat, much like his predecessors.

So, should India worry? Patel says, "India, I believe, should get off the list by next year as it is just on the borderline. India has a goods trade surplus with the US of $23 billion in 2017, but the much-touted LNG imports from the US started a few months ago." He pointed out that India is set to import $2 billion of crude oil and around $2 billion of LNG from the US - the first shipment of the latter, in fact, was loaded last month while the first cargo of shale arrived in late 2017 so they may not be part of the 2017 records yet. "Growing energy imports can reduce the surplus to below $20 billion and India should look to divert more oil imports from the Middle East to the US," he explained. The report added that the trend of a rise in US exports was already visible in 2017, wherein the US exports grew by around $4 billion while imports from India only grew $2.5 billion.

There's also good news where the other criterion of forex intervention is concerned. "Capital inflows into India have been exceptionally strong in 2017 - an outlier we think - given the outperformance of India equity and debt markets, and this may not repeat itself in 2018 or 2019. Equity markets are taking a breather as FIIs are finding Indian markets expensive and even the debt capital inflows are much lower this year as interest rate cycle picks speed in the US. So in all likelihood, the forex intervention by the RBI will be much less than $50 billion, what qualifies as 2 per cent of GDP," said the report.

According to Patel, some manoeuvring can help India drop off the list in the same way that Taiwan did. The latter has always had a strong current account balance as a percentage of its GDP, currently at 14 per cent of its GDP, but after reducing its forex intervention, Taiwan managed to exit the list in 2017.

"While India should strive to remain off the watchlist....being off the list is no guarantee that the US would not take any unilateral tariff measure," adds the report. "Indian policymakers should be worried due to the unpredictable nature of policy-making in the US under President Trump, especially concerning global trade." After all, he is already taking unilateral measures on trade and tariffs, with China as the primary target currently, citing threat to national security.

Wherein the US exports grew by around $4 billion while imports from India only grew $2.5 billion.

There's also good news where the other criterion of forex intervention is concerned. "Capital inflows into India have been exceptionally strong in 2017 - an outlier we think - given the outperformance of India equity and debt markets, and this may not repeat itself in 2018 or 2019. Equity markets are taking a breather as FIIs are finding Indian markets expensive and even the debt capital inflows are much lower this year as interest rate cycle picks speed in the US. So in all likelihood, the forex intervention by the RBI will be much less than $50 billion, what qualifies as 2 per cent of GDP," said the report.

According to Patel, some manoeuvring can help India drop off the list in the same way that Taiwan did. The latter has always had a strong current account balance as a percentage of its GDP, currently at 14 per cent of its GDP, but after reducing its forex intervention, Taiwan managed to exit the list in 2017.

"While India should strive to remain off the watchlist... being off the list is no guarantee that the US would not take any unilateral tariff measure," adds the report. "Indian policymakers should be worried due to the unpredictable nature of policy-making in the US under President Trump, especially concerning global trade." After all, he is already taking unilateral measures on trade and tariffs, with China as the primary target currently, citing threat to national security.

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