India has found itself again among the countries labelled as a currency manipulator in the US treasury department’s list. The move seems to have given strength to the view that the Reserve Bank of India (RBI) should let the rupee appreciate and reduce its intervention.
To be sure, the two issues may not be closely related. The US terming India as a currency manipulator does not come as a surprise. In 2018, when we found ourselves termed so in the semi-annual report on major trading partners, the RBI had sold $15 billion in the domestic spot forex market. It had also brought down its outstanding forward position to a negative $2.4 billion from $26 billion, indicating a rough sale of $23.6 billion through forward contracts.
In the first nine months of 2020, the central bank has bought a massive $57 billion just in the spot market. Its purchases through forward contracts are around $12.6 billion. The US Treasury department’s report said that the Indian central bank’s interventions added up to 2.4% of the country’s gross domestic product (GDP). This was a breach of one of the thresholds that the US monitors.
That said, being termed as a currency manipulator does increase caution among global forex market players. For the RBI, it gives more credence to arguments that the central bank should reduce its intervention. Analysts have pointed out that allowing the rupee to appreciate assists in keeping imported inflation under check.
The RBI needs all the assistance it can get on bringing down inflation since the retail headline print has been above its mandated 2-6% target for six straight months now. What’s more is that piling on foreign exchange reserves has a fiscal cost as it constrains RBI from buying more sovereign rupee bonds. India’s forex reserves of $533 billion are at their all-time highs currently. In a 25 November report, analysts at State Bank of India (SBI) had said that the abundant rupee liquidity and the domestic inflation warrant that the central bank loosens its grip on the forex market. “If the rupee is forcibly allowed to not appreciate, then it will be a problem for market players,” the note said.
Either way, the RBI has a challenging task ahead of balancing the need to pile on forex assets and keeping liquidity from getting out of hand.
Go to the news source: Currency manipulator or not, RBI could ease off a little on intervention