While the US has branded Switzerland and Vietnam as currency manipulators, it kept India under the currency manipulator ‘monitoring list’ for intentionally devaluing Indian Rupee. But why would RBI devalue the Indian Rupee? How are the currencies valued? Let’s throw some light on this matter.
Crux of the Matter
RBI Under Watchlist
US has put RBI under the watchlist of currency manipulators for intentionally devaluing the Indian rupee to gain benefits. You might wonder how devaluing the Rupee helps India? In simple terms, devaluing the Rupee helps in boosting exports to foreign countries, which results in boosting the economy. However, RBI can devalue the Rupee up to a certain extent only, otherwise, it may have ill effects on the Indian and the global economy.
In recent, RBI has been buying dollars and selling rupees in the global market. This can also be seen from the growing foreign exchange reserves of India, which stood at $578 billion in December.
For instance, if $1 = ₹75 today, then,
1. if the the value of the rupee becomes $1 = ₹80, then rupee is said to have depreciated,
2. if the value of the rupee becomes $1 = ₹70. then rupee is said to have appreciated.
How Did US Come To Know About It?
To identify currency manipulation, the US has set three benchmarks.
The first one is that the Bilateral trade surplus limit with the US should not cross $20 billion. In simple terms, the export value from India should not exceed the import value by more than $20 billion at any particular time. If India doesn’t import from the US and keeps exporting it will negatively impact the local market of the US. India has crossed this limit.
The second benchmark is that the current account surplus should be of at least 3% of GDP. Current Account has three components i.e. good and services, income, and current transfers. The goods and services measure the exports and imports of goods and services, income accounts for the government’s income and spending on financial investments, and current transfers include one-way gifts and remittances made in the country.
If the sum of these three components is less than zero, then the current account is in deficit, and if it is greater than zero, the current account is in surplus. Currently, India does not have a current account surplus of more than 3% of GDP.
The last benchmark is that the net purchase of foreign currency should not be more than 2% of the GDP of the last 1 year. According to the US, RBI has been excessively buying foreign currency, thereby intentionally devaluing the value of the Rupee.
- According to the Bretton Woods system, each country had to adopt a monetary policy that maintained its external exchange rates within 1% by tying its currency to gold. It was established in the cold war era and dissolved in 1968-1973.
- Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
- The most valuable foreign currency is the Kuwaiti Dinar. One dinar is worth approximately $3.28 or ₹241.13.