India rejoins US watchlist in possible boost for rupee, bonds

By Subhadip Sircar

India’s addition to the U.S. watchlist for currency manipulation is a trial for its central bank, and a possible boon for local currency- and bond markets.

The U.S. Treasury Department’s latest foreign-exchange report cited India’s “significant” goods trade surplus with the U.S. and “sustained” net currency purchases through the year to June. Authorities should limit such intervention to periods of excessive volatility, while allowing the rupee to adjust based on economic fundamentals, officials wrote.


The central bank’s headache -- which comes on top of above-target inflation and struggling growth -- looks like a boost for the rupee. The currency has been Asia’s worst performer this year, as the Reserve Bank of India has countered relentless foreign investment inflows with dollar purchases that have pushed the country’s reserves to a record $579 billion. That’s catching up with Russia, which has the world’s fourth-largest stockpile.

This latest U.S. attention “could keep RBI guarded on aggressive forex intervention,” said Madhavi Arora, lead economist at Emkay Securities Ltd. “A slightly toned-down stance can be rupee-positive at the margin.”

The U.S. dollar was 0.2 per cent lower versus the rupee, at 73.4450 Thursday.

A pullback in forex intervention could also support India’s bond market, in Arora’s view, as the central bank may buy more government debt as an alternative way to provide liquidity. The RBI’s open market operations have spurred rallies in sovereign bonds, helping to offset the impact of larger debt sales.

The RBI’s large dollar purchases have drawn attention before: India was on the Treasury’s watchlist in April 2018. And they’ve proven troublesome more recently, as last month the flood of cash caused short-term rates to collapse. Policy makers are reportedly debating the cost of accumulating such reserves and the need to diversify for better returns. Most of India’s stockpile is held in U.S. dollars, with India’s U.S. Treasury holdings at a record $222.4 billion.

An RBI spokesperson didn’t immediately reply to a email seeking comment on the U.S. Treasury report.

At the December policy meeting, RBI Governor Shaktikanta Das said that the central bank irons out excess volatility and keeps the currency in line with underlying fundamentals.

“RBI is doing the appropriate thing,” said Sanjeev Sanyal, principal economic adviser in the finance ministry, before the Treasury’s report was released. “They are accumulating reserves at a time when they are managing the exchange rate in a sensible way.”