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US Treasury to monitor India’s foreign exchange reserves

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India’s net foreign exchange purchases have increased considerably in the first half of 2017.

The US Treasury has said that the department will closely monitor the foreign exchange reserves of India as it shows a notable increase in the scale and persistence. The decision comes two months after India’s foreign exchange reserves touched a life-time high of USD 393.448 billion in August.

“The Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies,’’ said the Treasury in a report titled Foreign Exchange Policies of Major Trading Partners of the United States.

India’s net foreign exchange purchases have increased considerably in the first half of 2017. It has increased to $42 billion over the four quarters through June 2017. India’s bilateral goods surplus with the US, over the four quarters through June 2017, is around $23 billion.

“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 percent of GDP) over the four quarters through June 2017,” the Treasury noted in its half-yearly report.

The Treasury takes into account three criteria to decide whether it is necessary to closely monitor the foreign exchange policies of a country. These include bilateral trade surplus with the United States of at least $20 billion and a current account deficit of at least 3 percent of gross domestic product (GDP) with the US.  Moreover, the Treasury assesses net purchases of foreign currency, conducted repeatedly, totaling in excess of 2 percent of an economy’s GDP over a period of 12 months to be persistent, one-sided intervention.

“India is very close to meeting this criterion (the last of the three) for the four quarters ending June 2017, with net purchases of foreign currency slightly below 2% of GDP,” the report said.  Apart from India, Switzerland and Brazil also have met this criterion for the four quarters ending June 2017.

The growth in India’s foreign exchange purchases was caused by the aggressive intervention of The Reserve Bank of India (RBI) in the currency market to prevent a strong appreciation of the Rupee against the Dollar.

Though the decision by the Treasury Department to closely monitor India’s foreign exchange police won’t have any immediate impact, it may become a point of discussion in future trade negotiations.