Understanding Currency Manipulators: The Impact and Actions by Major Economies

Introduction

America has recently put several countries, including India, on the list of currency manipulators. This designation highlights the role that various nations play in influencing exchange rates to gain a competitive edge in international trade. But what exactly are currency manipulators, and what actions are these countries taking?

What Are Currency Manipulators?

Currency manipulators are countries that deliberately alter the value of their currency relative to others to boost their export competitiveness and weaken the costs of imports. This is often accomplished through central bank intervention in the foreign exchange market. The actions taken by these countries aim to maintain a favorable exchange rate for their exports, thereby enhancing their economic power on the global stage.

The Impact on Exports and Imports

The impact of currency manipulators can be stark, especially when it comes to exports and imports. Let's consider a hypothetical example to better understand these dynamics:

Impact on Exports: A Strong Indian Economy

Suppose the USD is valued at 75 INR to 1 today, and due to a robust economy and strong business environment in India, it strengthens to 70 INR to 1 USD tomorrow.

An Indian exporter exports 75 Crore INR worth of services to the USA. Under the old exchange rate, the US would pay 1 Crore or 10 million USD. However, at the new exchange rate, the US would have to pay 1.071 Crore or 107.10 million USD. This represents a 7% increase in the price of exported services, making them less competitive and potentially reducing market share.

Therefore, to maintain the competitiveness of these services, India's central bank (RBI) would step in, buying enough USD with INR to keep the exchange rate at 75 INR to 1 USD. This is a common strategy used by countries with significant exports to ensure that the cost of their products remains competitive.

Impact on Imports: A Weak Indian Economy

Now consider the opposite scenario, where the INR weakens from 75 INR to 1 USD to 80 INR to 1 USD. This results in imports becoming more expensive, and exports becoming cheaper.

For example, if 1 million USD of crude oil now costs Rs. 5 million more, imports would become significantly more expensive. However, the cost of 75 Crore INR of exported services would drop to 9.375 million USD, making them more appealing to foreign buyers.

Such a scenario can lead to a widening trade deficit. To counter this, the central bank would sell USD at 75 INR to foreign exchange banks to maintain the exchange rate at its previous level. Countries with minimal exports and significant trade deficits use this strategy to minimize their trade deficits, increase export revenues, and keep import costs low. India is an example of this, though on a smaller scale compared to countries like Venezuela.

Actions Against Currency Manipulators

Amid accusations of currency manipulation, major economies like America can take various actions. These may include:

Economic Sanctions: Imposing trade barriers or restrictions on manipulative countries to disrupt their economic strategies. International Scrutiny: Calling out manipulative practices in international forums to draw attention to the issue. Direct Dialogue: Engaging in diplomatic discussions with the manipulated countries to address the concerns.

While these actions can be impactful, they often involve a delicate balance to maintain global trade stability and economic cooperation.

Conclusion

The list of currency manipulators is a serious accusation with significant implications for global trade. Understanding the dynamics of currency manipulation and the actions being taken can help in navigating these complex economic challenges. For nations like India, staying informed and proactive is key to maintaining a competitive edge in the global market.