India’s addition to the US Treasury’s monitoring list for currency manipulation makes it more likely the Reserve Bank of India will give freer rein to the rupee when it rises against the dollar, analysts say. India increased its purchases of foreign currency last year and has a “significant” trade surplus with the US, the Treasury noted in its semi-annual report on foreign-exchange practices released in Washington on Friday. The rupee has been the second-worst performing Asian currency this year, dropping 2.4 per cent against the dollar, after strengthening 6.4 per cent in 2017.Here’s what analysts said:It’s possible Indian authorities will feel more pressure to refrain from intervening to stem gains in the rupee when it starts strengthening India does have one of the strongest FX reserve positions in the regionThere’s very little chance of India being named as a manipulator in the future, given that it runs persistent current-account deficits, Goh writes in note While the RBI is unlikely to cease FX intervention activity entirely, it will likely scale back the amount to move below the 2% of GDP threshold, he says in interview; that means average net FX purchases will have to stay below $4b a month When portfolio inflows pick up, the INR could strengthen more, and at times when the rupee comes under pressure, the central bank may limiting the extent of its weakness by utilizing some of the reserves, Goh says in interview.With this attention from the US Treasury, the probability of INR strength going forward is even less, Heng and Liew write in note; rising oil prices could cause India’s current-account deficit to widen as the nation imports most of its energy needsGiven India’s persistent current-account deficit and slight INR overvaluation, the risk of India being named a currency manipulator in the future remains extremely low India will likely drop off the monitoring list in the coming year, given a probable widening of the current-account shortfall and more modest capital inflows reducing reserves accumulationBeing on the US watchlist may not exert a significant impact on the rupee, apart from an initial reaction The RBI’s forward book has fallen back since last September and it’s highly unlikely that India will meet the second criteria – a current-account surplus – anytime soon The US Treasury said in its report that the INR isn’t deemed undervalued by the International Monetary FundEven though Thailand wasn’t added to monitoring list, the US is considering expanding the number of nations covered by its semi-annual FX report, meaning Thailand could be added in the next report in October “Personally, it was a bit of surprise that India was added to the monitoring list”ANZ’s GohTreasury said in the report it may look beyond the US’s 12 major trading partners at the next report, meaning Thailand and Malaysia could be put on the monitoring list in October, Goh writes in note.

Source: Economic Times April 16, 2018 07:36 UTC