Enough Indian economists will tell you the rupee is overvalued and needs to be at around 68-70 to the dollar to be at its true value. The over-valuation, it goes without saying, hurts India’s exports; and its origins lie in the massive FPI flows into the country to take advantage of the booming stock market and high interest rates on government securities. High flows, in turn, make the rupee stronger and that gives a further fillip to FPI since they make money on both the higher interest rates as well as on the exchange appreciation—that makes India the darling of the global carry trade. And, as long as RBI doesn’t lower interest rates, it is difficult to see how the rupee’s appreciation can be stemmed—the central bank is trying to buy dollars, but that doesn’t seem to be helping.
Given this, some of the conclusions in the US Treasury’s report to Congress on “Foreign Exchange Policies of Major Trading Partners of the United States” are quite extraordinary. The US lists three criterion for judging whether it needs to take action against its partners—a bilateral trade surplus of at least $20 billion, an overall current account surplus of at least 3% of GDP and net purchases of foreign currency amounting to at least 2% of GDP over a 12-month period. None of the US’s trading partners, the report concedes, meets all three criterion. Even so, it puts out a monitoring list comprising China, Japan, Korea, Germany, and Switzerland.
China has a trade surplus of $357 billion with the US, Japan $69 billion, Germany $63 billion and India $23 billion. While China’s overall current account surplus is 1.3% of GDP, Japan’s is 3.7%, Germany’s a whopping 7.7% and India has a deficit of 1.3%. What is amazing is how, despite questioning the policies of markets like China and Germany, the US is willing to give them the benefit of doubt. In the case of Germany, while the ECB is not active in currency markets, Germany gets a free ride because the weak European economies keep the euro weak relative to Germany’s strength—Germany is not a currency manipulator but it gets the advantages of a weak currency. And in the case of China, the fact is it kept a weak currency for decades to boost exports—the report is happy to support China’s “recent intervention in foreign exchange markets (which) likely prevented a disorderly currency depreciation that would have had negative consequences for the United States, China, and the global economy”. Given this, it is amazing the US should think India is manipulating its currency—“there has been a notable increase in the scale and persistence of India’s net foreign exchange purchases … (1.8 percent of GDP)”—and plan to closely monitor “India’s foreign exchange and macroeconomic policies”.