Let us first look at what this removal from the currency monitoring list is all about.
It is actually a routine review by the US government
As part of the semi-annual exchange reported to the US Congress, the US administration had decided to drop the names of just two nations India and Switzerland from the CML. The US normally does this as a routine exercise with all countries that have a large trading relationship with the US. The list is intended to underline that the exporting country could be using means to artificially keep its currency devalued, thereby benefitting its economy. The CML currently includes marquee names such as China, South Korea, Japan, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam. While the removal or inclusion in the monitoring list does not have any immediate implication, the US normally uses this list to send a signal to the global markets.
Why India was first included and then excluded from the CML?
India was included in the list only in May 2018 as it had been heavily buying dollars then to weaken the rupee and boost exports.
The inclusion in the CML is based on the following three criteria:
- The country must be running a significant trade surplus with the US. While most of South East Asia has been an export hub, India also runs a trade surplus with the US, while Switzerland runs a current account surplus.
- The country should be selling its domestic currency substantially more frequently than buying its own currency. Post the IL&FS crisis in July 2018, India became a heavy seller in dollars to defend the rupee and this exercise worked in India’s favor in this case.
- The country should have used other means to secularly weaken its currency with a view to boosting exports.
- During the latest review of trading partners, the US found that India and Switzerland only met the first criterion of running a surplus with the US but not the other two criteria. This was one of the main reasons why these two countries were removed from the CML:
What signal is the US trying to send through this move?While it may be premature to draw any conclusions, the significance of the current move cannot be ignored.
Let us look at some key data points.
- The US is in the midst of a long drawn trade war with China, and it would be keen to push China to the corner by deepening its trade relations with India.
- In the aftermath of the Huawei blacklisting by the US, many US companies have spoken about moving their facilities out of China. While South East Asia may have been the preferred destination, the opportunity also fits the “Make in India” motto.
- There seems to be a political synchronization that Trump sees with India. Modi has just been voted back to power in India and Trump fancies his chances of a second stint at presidency in 2020. This could pave the way for both to work seamlessly till 2024.