The US has added India to the currency practices and macroeconomic policies monitoring list, saying New Delhi increased its purchase of foreign exchange over the first three quarters of 2017 which does not appear necessary.
"India increased its purchase of foreign exchange over the first three quarters of 2017. Despite a sharp drop-off in purchase in the fourth quarter, net annual purchase of foreign exchange reached USD 56 billion in 2017, equivalent to 2.2 per cent of the GDP," the US Department of the Treasury said in its semi-annual report to the Congress.
The pick-up in purchases came amidst relatively strong foreign inflows, both of foreign direct investment and portfolio investment, it said.
Notwithstanding the increase in intervention, the rupee appreciated by more than six per cent against the dollar and by more than three per cent on a real effective basis in 2017, it noted.
Treasury told the Congress that India has a significant bilateral goods trade surplus with the US, totalling USD 23 billion in 2017, but India's current account is in deficit at 1.5 per cent of the GDP and the exchange rate is not deemed to be undervalued by the IMF.
"Given that Indian foreign exchange reserves are ample by common metrics, and that India maintains some controls on both inbound and outbound flows of private capital, further reserve accumulation does not appear necessary," the Treasury said, explaining the reasons for adding India to the list.
Treasury assesses net purchases of foreign currency, conducted repeatedly, totalling in excess of 2 per cent of an economy's GDP over a period of 12 months to be persistent, one-sided intervention, the report said.
"Switzerland and India meet this criterion for the four quarters ending December 2017, as per Treasury estimates," it said.
According to the Treasury, India's current account deficit widened modestly in 2017 to 1.5 per cent of the GDP, following several years of narrowing from its 2012 peak.
The current account deficit has been driven by a large and persistent goods trade deficit, which has in turn resulted from substantial gold and petroleum imports.
The goods trade deficit has fallen over the last few years as policy changes limited gold imports and the decline in oil prices narrowed the oil balance from 2014, though the goods trade deficit widened in 2017 to 5.9 per cent of the GDP.
The IMF projects the current account deficit to widen to about two per cent of the GDP over the medium term as domestic demand strengthens further and given the rebound in commodity prices.
India's goods trade surplus with the US was USD 23 billion in 2017, the highest level on record. Given that India also runs a services surplus with the US of USD 6 billion, India's combined goods and services trade surplus with the US was USD 28 billion in 2017, the report said.
India's exports to the US are concentrated in sectors that reflect India's global specialisation (notably pharmaceuticals and IT services), while US exports to India are dominated by key service trade categories, particularly travel and higher education, it said.
Treasury said India has been exemplary in publishing its foreign exchange market intervention.
According to the authorities' data, India has generally been a net purchaser of foreign exchange since late 2013, when the Reserve Bank of India (RBI) sought to build a stronger external buffer in the wake of large emerging market outflows globally.
Prior to 2013, intervention for several years had generally been less frequent, and when it had occurred it had been broadly symmetric, as for example during 2007 and 2008 when the RBI engaged in both purchases and sales of foreign exchange at various points in the midst of volatile global financial markets, it added.
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