EXPLAINED: US adds India into the currency manipulation watchlist; What it means, implications?

The US Treasury Department (USDT) has put India back on its currency manipulation watchlist. India was included in this list in 2018 but removed in 2019, now it's 2020, and India is back.

USDT's semi-annual report on the macroeconomic and foreign exchange policies list countries that may be intervening excessively in their foreign exchange (forex) markets to gain an unfair trade advantage.

The list also includes China, Korea, Japan, Italy, Singapore, Germany, Thailand, Malaysia, and Taiwan.

Currency manipulation is a process defined by the USDT for countries that engage in unfair currency practices to gain a trade advantage.

It is an attempt made by a country's central bank to decrease the value of their currency with respect to foreign currency exchange rates, the dollar, in this case.

To weaken its currency, a country sells its currency and buys foreign currency—usually USD. This results in weak demand for the local currency and increased demand for US dollars.

USDT uses three benchmarks to judge whether a country has manipulated its currency:

a bilateral trade surplus with the US of more than $20 billion,

a current account surplus of at least 3 percent of GDP,

net purchases of foreign currency of 2 percent of GDP over 12 months.

Per the USDT report, India had a trade surplus with the US worth $22 billion in the four quarters through June 2020.

India's first four-quarter current account surplus was 0.4 percent of GDP, unchanged since 2004.

Further, India's net purchases of foreign currency stood at 2.4 percent of GDP. India increased its purchases of foreign currency as portfolio flows surged in the second half of 2020.

India was added to the list because it meets two of the three criteria laid down by the US Treasury.

"Treasury encourages the authorities to limit foreign exchange intervention to periods of excessive volatility while allowing the rupee to adjust based on economic fundamentals. By further opening the economy to foreign investors, India can also support economic recovery and bolster long-term growth," said the USDT report.