Economics, International Relations
Context: The U.S. Department of Treasury removed India along with Italy, Mexico, Thailand and Vietnam from its Currency Monitoring List of major trading partners.
About Currency Monitoring List:
- Putting a country under the Currency Monitoring List would mean that the country is artificially lowering the value of its currency to gain an unfair advantage over others.
- This is because the lower value of the currency will lead to a reduction of the export costs from that country.
- The US Department of Treasury releases a semi-annual report in which it tracks global economic developments and reviews foreign exchange rates.
- It also reviews the currency practices of the US’ 20 biggest trading partners.
- There are three criteria based on which a country is put under the currency watch list.
- 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.
- 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 gross domestic product (GDP) over a 12-month period.
- 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 a country meets all three criteria, it is labelled as a ‘currency manipulator’ by the US Department of Treasury.
- Once on the Monitoring List, an economy will remain there for at least two consecutive reports to help ensure that any improvement in performance versus the criteria is durable and is not due to temporary factors.
The following countries are presently on the list:
- China, Japan, Korea, Germany, Malaysia, Singapore and Taiwan.
Reasons for removal of India from the list:
- India was removed from the Monitoring List as they now only met one of the three criteria for two consecutive reports.
- India has been on the list for about two years.
How does it impact India?
- When on the US’ Currency Monitoring List, a country is considered a ‘currency manipulator’.
- A currency manipulator is a designation applied by US government authorities to countries that engage in unfair currency practices for a trade advantage.
- This removal from US’ Currency Monitoring List means that the Reserve Bank of India (RBI) 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.
About Currency Manipulator:
- A currency manipulator is a designation applied by US government authorities to countries that engage in “unfair currency practices” for a trade advantage.
- Putting a country under the Currency Monitoring List would mean that the country is artificially lowering the value of its currency to gain an unfair advantage over others.
- This is because the lower value of the currency will lead to a reduction of the export costs from that country.
Source:NewsOnAir
Previous Year Question
Q.1) Consider the following statements:
- Tight monetary policy of US Federal Reserve could lead to capital flight.
- Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
- Devaluation of domestic currency decreases the currency risk associated with ECBS.
Which of the statements given above are correct? (2022)
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
