RBI intervention nearing its limits?

How much can a country intervene in the FX markets?

The answer could be dependent on the domestic liquidity where India is already struggling with addition systematic surplus post demonetization. Or the answer could be derived from the US filter used to derive a list of currency manipulators. The US would label a country a currency manipulator if it meets the 3 criteria below:

1.      More than 2% of GDP of current account surplus

2.      More than USD 20 bn of bilateral trade surplus with the US

3.      More than 2% of GDP of intervention in the currency markets to depreciate the non US currency

Currently India only meets the 2^nd criteria. None of the countries met all 3 criteria and 6 countries which met 2 out of 3 were put on a watch list (Switzerland, Germany, Japan, China, South Korea and Taiwan). India now is running the risk of meeting the 3^rd criteria of intervention and therefore could be put on the watch list.

India has added almost USD 37 bn of reserves in 2017 including spot and forward positions (table below). India’s GDP at 2.11 trillion USD allows it to intervene to the extent of USD 42 bn for the entire year. Therefore perhaps RBI is reaching the limit to the intervention it would want to do in the FX markets. The thought that it would ignore the US watch list looks farfetched because of the heavy dependence of India’s exports, investments and specially the performance of IT industry on the US economy.  

USD Billion	31-Dec-16	31-Mar-17	02-Jun-17	Movement in 2017
Spot Reserves	359	370	381	22
Forward Reserves	2.7	13	18 (assumed as data is not available as yet)	15.3
Total	361.7	383	381	37.3