Imagined fears: US treasury’s report on India’s forex reserves misses the wood for the trees

The US treasury department delivers a semi-annual report to the Congress on the foreign exchange policies of its major trading partners. In a report issued last week, India’s policies drew an adverse observation. The treasury is unimpressed with RBI’s foreign exchange market intervention and believes the central bank should refrain from excessive forex reserve accumulation. The reason such views assume salience is that they contribute to trade friction between the two countries. It makes it harder for both governments to conclude a trade agreement and remove some of the impediments that exist today.

All economies have to contend with the impossible trinity. That is, a country cannot simultaneously have an open capital account, a fixed exchange rate and an independent monetary policy. At any point, it has to choose two of the three options. The treasury report acknowledges the difficult operating environment in 2020 and adds that the rupee was buffeted by the substantial swings in global risk appetite. These swings, in turn, influence foreign capital flows. It makes RBI’s job tricky at the best of times. Last year, the central bank took on the responsibility of being the spearhead in the attempt to revive economic growth.

One of the consequences of an independent monetary policy last year was an increase in RBI’s foreign exchange reserves by about 23% since the first lockdown to the current level of $539 billion. A lot of forex market intervention is catalysed by the monetary policies of central banks such as the US Federal Reserve. The waves of capital flows that follow their actions force emerging market central banks to intervene to shield their economies. A fair assessment of the situation will show that India’s policies are in pursuit of reasonable objectives. Currency manipulation is an imagined fear. The US treasury needs to do better if it wants to promote trade.


This piece appeared as an editorial opinion in the print edition of The Times of India.



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