Oct 20, 2017
The US Treasury has said that it would keep a watch on India’s increasing foreign exchange reserves as Mint Street continues to accumulate the dollar to arrest the appreciation of the rupee.
The Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies,’ said the Treasury in a report titled Foreign Exchange Policies of Major Trading Partners of the United States. The report was submitted to the US Congress. A watch does not mean anything adverse or positive at this point, but it could become a point of discussion whenever there are negotiations on trade-related matters between the world’s two biggest democracies.
Over the first half of 2017, there has been a notable increase in the scale and persistence of India’s net foreign exchange purchases, which have risen to around $42 billion (1.8% of GDP) over the four quarters through June 2017. India has a significant bilateral goods trade surplus with the United States, totalling $23 billion over the four quarters through June 2017, the report said.
Treasury has established thresholds for the three criterias that determine whether there is a need for enhanced analysis and vigilance of any country’s foreign exchange policies. These include bilateral trade surplus with the United States of at least $20 billion, and a current account deficit of at least 3% of gross domestic product (GDP) with the US.
Furthermore, a persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and it totals at least 2 percent of an economy’s GDP over a 12-month period.
India is very close to meeting this criterion (the last of the three) for the four quarters ending June 2017, with net purchases of foreign currency slightly below 2% of GDP, the report said.
The Reserve Bank of India (RBI) has been aggressively intervening in the currency markets in the recent past to arrest a steep appreciation of the rupee against the dollar. Currently, as of October 6, India’s foreign exchange reserves were at $398 billion after having crossed $400 billion mid-September. But if one factors in the RBI’s forward market purchases, India’s reserves could be well over 420 billion, estimate economists.
Source: The Economic Times