US Treasury closely monitoring India's policies, forex

India’s rising foreign exchange reserves and trade surplus with the United States have attracted the attention of the US Treasury Department, which will now take an interest in India’s macroeconomic policies. 

“Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies,” said the October issue of the Treasury publication “Foreign Exchange Policies of Major Trading Partners of the United States”.

India is one of the 13 largest trading partners of the United States, and as of June 2017, ran a trade surplus of $23 billion with the US, which the department termed “significant”. 

Traditionally, emerging markets have maintained foreign exchange reserves at more than their required levels, but India has been more aggressive in this regard. The publication said while India’s foreign exchange reserves were 16 per cent of its gross domestic product (GDP), lower than many of the US’s trading partners, India’s reserves as a percentage of short-term external debt are at 412 per cent, the second-highest among all major trading partners of the US. 

Short-term debts are those obligations that mature in a year. 

In the April issue of the same publication, India came on top of the list in short-term external debt coverage, with 427 per cent of the liabilities covered. 

“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 per cent of GDP) over the four quarters through June 2017,” the report said. 

India has a significant bilateral goods trade surplus with the United States, totalling $23 billion over the four quarters through June this year. 

The criteria for coming into the focus of the US Treasury are “net purchases of foreign currency, conducted repeatedly, totaling in excess of 2 per cent of an economy’s GDP over a period of 12 months”.

“India is very close to meeting this criterion for the four quarters ending June 2017, with net purchases of foreign currency slightly below 2 percent of GDP,” the report said. 

Since then, the Reserve Bank of India (RBI) has stepped up its reserves accumulation and India’s reserves now stand at $400.3 billion. At the end of June, when the Treasury study was conducted, reserves stood at around $362 billion. 

Reserves in Korea, India and Taiwan are currently at or near all-time high levels.

Clearly India’s foreign exchange reserves are in excess of what can be considered adequate. Although there is no one rule to measure reserves adequacy, emerging markets have been aggressively building up reserves in excess of their current needs, observed the report. 

India’s reserves are now at more than 13 months’ imports, against its below seven-month import in 2013. The reserve adequacy, going by the metrics of the International Monetary Fund (IMF), differs from one country to another. Generally, for India, reserves of seven months are considered adequate. 

However, economists say the accumulation of India’s reserves is the result of a huge fund inflow and if the funds flow out for any reason, the central bank will have to actively intervene to protect the rupee and in such times reserves will eventually may get drained out.