Gold Silver Reports (GSR) – Forex Intervention & Reserves — The third criteria used by the U.S. Treasury department is the only real reason why India has been included in the watch list of currency manipulators.
Large inflows of foreign capital into India over the last couple of years has led to increased intervention in the forex markets in India. The RBI conducted net purchases of foreign exchange to the tune of $56 billion in 2017, including activity in the forward market, said the report. This is equivalent to about 2.2 percent of GDP–marginally above the Treasury Department’s threshold.
Intervention, via purchase of foreign exchange in the spot and forward market, have risen mostly because of the pick-up in foreign flows. The country has received foreign direct investment of $34 billion and foreign portfolio flows of $26 billion over the first three quarters of the year, the report said.
While the RBI’s stated stance is that it steps in to curb excess volatility in the foreign exchange market and not to manage the rate of exchange, there are two reasons for the increased intervention.
One perceived reason is the need to ensure that India has adequate forex reserves to deal with a situation where there are large outflows. A scenario like this could emerge as developed market central banks normalize monetary policy. India, in 2013, saw its currency plummet when the U.S. Federal Reserve first suggested normalisation of monetary policy. While India’s fundamentals have improved since then, the memory of falling reserves, which led to the RBI announcing a special scheme to draw-in foreign deposits, is probably still fresh in the minds of policymakers.
At $425 billion, the U.S. Treasury Department argues that India’s forex reserves are now adequate. – Neal Bhai Reports (NBR)