Washington: The US could remove India from its currency monitoring list of major trading partners, the Treasury Department said, citing certain developments and steps taken by New Delhi, which address some of its major concerns.

India was for the first time, in April, placed by the US in its currency monitoring list of countries with potentially questionable foreign exchange policies along with five other countries — China, Germany, Japan, South Korea and Switzerland.

The Department of Treasury maintained the same monitoring list in its latest report released on Wednesday, but said if India continued with the same practices as in the last six months, it would be removed from its next bi-annual report.

“India’s circumstances have shifted markedly, as the central bank’s net sales of foreign exchange over the first six months of 2018 led net purchases over the four quarters through June 2018 to fall to $4 billion, or 0.2% of GDP," the US Treasury said in its latest semi-annual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the US.

This represented a notable change from 2017, when purchases over the first three quarters of the year pushed net purchases of foreign exchange above 2% of GDP.

Recent sales came amid a turnaround in foreign portfolio inflows, as foreign investors pulled portfolio capital out of India (and many other emerging markets) over the first half of the year, it said. The rupee depreciated by around 7% against the dollar and by more than 4% on a real effective basis in the first half of 2018, it added.

India has a significant bilateral goods trade surplus with the US, totalling $23 billion over the four quarters through June 2018, but India’s current account is in deficit at 1.9% of GDP.

“As a result, India now only meets one of the three criteria from the 2015 Act. If this remains the case at the time of its next report, Treasury would remove India from the monitoring list," according to the report.

Observing that India’s current account deficit widened in the four quarters through June 2018 to 1.9% of GDP, following several years of narrowing from its 2012 peak, the Treasury said the current account deficit has been driven by a large and persistent goods trade deficit, which has in turn resulted from substantial gold and petroleum imports.

The goods trade deficit widened in the first half to 6.4% of GDP due to rising oil prices.

The IMF projects the current account deficit to be around 2.5% of GDP over the medium term as domestic demand strengthens further and favourable growth prospects support investment.

India’s goods trade surplus with the US was $23 billion for the four quarters through June 2018, it said, adding, India also had a small surplus in services trade of $4 billion with the US over the same period.

“India’s exports to the US are concentrated in sectors that reflect India’s global specialisation (notably pharmaceuticals and IT services), while US exports to India are dominated by key service trade categories, particularly travel and higher education," according to the report.

The Treasury praised India for being “exemplary" in publishing its foreign exchange market intervention.

The Reserve Bank of India (RBI) had noted that the value of the rupee was broadly market-determined, with the intervention used only during “episodes of undue volatility," it said.

According to data, India was generally a net purchaser of foreign exchange from late 2013 to the middle of 2017, as the RBI sought to gradually build a stronger external buffer in the aftermath of the May 2013 “taper tantrum". Purchases accelerated in the first half of 2017 amid strong portfolio inflows to India (and many other emerging markets); as a result, cumulative net purchases of foreign exchange exceeded 2% of GDP over 2017, it said.

Noting that foreign exchange purchases generally declined in the second half of 2017, and the RBI shifted to selling foreign exchange in the first half of 2018, the Treasury said net purchases of foreign exchange over the past four quarters through June totalled $4 billion (0.2% of GDP), including activity in the forward market.

As of June 2018, foreign currency reserves stood at $380 billion, equal to 3.7 times gross short-term external debt, eight months of import cover, and 14% of GDP.

“The rupee depreciated 7% against the dollar in the first half of the year, while the real effective exchange rate also reversed its general uptrend from the last few years, depreciating by 4%," it said.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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