Market to determine the value of the Currency based on the current economic situation

The latest news concerning the fact that the US Treasury has put some countries on its watch list for currency manipulation has raised fears about what this might mean for the rupee. So what is this story all about and what might happen next?

Why This Situation Arose

The US Treasury brings out a currency manipulation report a couple of times a year. It shows which countries among their major trading partners they believe have been acting improperly in their currency exchange policies. This most recent report includes ten countries on it that meet their criteria in this respect.

Among the seven names that have been mentioned in the past and retain their positions on the list are China, Japan and Germany. The three new countries to be added this time are India, Taiwan and Thailand. This is the third time that India has been added to the watch list in the last few years.

The main reason that India is now included on this list is that the country’s authorities have been carrying out a program of buying US dollars. This approach has seen India’s forex reserves increase by $100 billion in the fiscal year to date and there are currently few signs of this rate of purchasing slowing down any time soon.

The report released in December 2020 put a particular focus on Vietnam and Switzerland for their activity in this respect. India had been on the list until last year when it was removed from it. However, the current report puts it back on there and makes sure that the country is once again a focus of attention.

In the four quarters to June this year, India’s bilateral goods trade surplus with the US ran to a total of $22 billion. We can also see that the central bank increased their rate of foreign exchange purchases at the end of 2019 and again in 2020, leading to net purchases adding up to 2.4% of the national GDP in the 12 months ending in June this year.

What Does This Mean?

The American Treasury officials base their decisions on each country’s exchange rate management in terms of the Omnibus Trade and Competitiveness Act of 198. They look out for practices that could give a country an unfair advantage in international trade, through foreign exchange intervention and other ways.

The US Treasury suggests that India should only intervene in the currency exchange markets in times of “excessive volatility”, allowing the market to determine the value of the rupee based on the current economic situation. They also suggested that opening up to more foreign investors could help the Indian economy to grow and speed up its recovery from recent losses.

Source: Pixabay

Possible Effects on the Rupee

In the meantime, what could happen to the value of the rupee due to these developments? It really depends upon what happens next. For instance, if India stops buying so many dollars, the rupee could rise in value against this currency. If they keep on buying dollars then this could act to keep the rupee’s value down, although there are many other factors to take into account when we consider how the exchange rate is calculated.

The value of the rupee against the USD and other major currencies is determined by the activity in the growing global forex market. As confirmed by TopRatedForexBrokers, newcomers can take advantage of a welcome bonus to start trading on different currency pairs such as the rupee and the dollar. They may also take part in forex contests and competitions as they each attempt to gain an advantage in this highly competitive market.

Some analysts believe that the country’s forex reserves are already large enough anyway, as they currently run at more than a year’s worth of imports. In fact, most other countries have already stopped buying USD at this rate because of the risk of imbalance that it brings.

It is worth keeping an eye on this matter, to help us to understand how the rupee and the overall Indian economy could be affected by it.