 Hello, my dear friends and Chanakya IAS fraternity. I welcome you all to today's topic in news that is currency manipulation. We will be analyzing the relevance of this news and cover the wholesome aspect that how it is important from the point of view of UPSC civil service exam and how beneficial it will be for UPSC aspirants. We will be covering the news on currency manipulation from to the advanced level of the concept. So, you just have to watch this full video to get hold over this topic and stay tuned till the last of the video. So, before going into the discussion, I want to share a question with you all guys. Listen the question very carefully. Consider the following statements. The statement says, currency devaluation is a deliberative attempt of the market forces of the country to gain significant advantages in their operations. And second statement says, frequent currency devaluations can lead to currency wars. Which of the statements given above are correct? Your options are option A, one only, option B, two only, option C, both one and two and option D, neither one and two. Lock your answers till the end of the video. And if you don't know the answer, watch the video till the last of the concept and you will get the answer. So, moving ahead, we will discuss that why currency manipulation isn't news and what is the context of this discussion. It is the most important thing to know that what is the context. So, the very recently, United States has once again included India in its monitoring list of countries with potentially questionable foreign exchange policies and currency manipulation. So, United States has put a tag of currency manipulator on India and it has put India again on its currency manipulation list. And it claimed that the foreign exchange policies adopted by India are questionable. And the US Department of the Treasury Office of International Affairs in its latest report to the US Congress has included India, Taiwan and Thailand to its monitoring list of major trading partners that merit close attention to their currency practices and macroeconomic policies. So, after discussing the context of the video, now we would be dealing with the basics of the currency manipulation. What are the basics of currency manipulation? So, currency manipulation is basically a level given by the US government to the countries it feels are engaging in unfair currency practices. The key word is unfair currency practices by deliberately devaluating their currency against the dollar. So, just imagine like if dollar is the currency of US and rupees is the currency of India, so either India is devaluating its currency frequently, time and again to challenge the foreign exchange rate with respect to dollar. So, currency manipulation is basically a tag given by US government to countries that are engaging in unfair currency practices. So, this practice would mean that the country in question is artificially lowering the value of its currency to gain an unfair advantage over the others. So, we will be discussing that what is devaluation. Okay, devaluation is basically a concept under which the currency is devalued. In simple terms, it can be said that in devaluation, the currency's value falls. How does it fall? If, let's say, the first dollar was of 50 rupees and today's date is of the same value of 1 dollar, so what is the exchange rate here? It is devalued. Why is devalued? It is devalued because there are some objectives of the government. How can there be objectives? Let's assume that you have to promote the export and reduce the import. So, if you reduce the import and export, then what will you have to do? You have to devaluate the currency. So, who does devaluation? It is devalued by the government. Okay. So, this is because the devaluation would reduce the cost of exports from the country and artificially show a reduction in rate deficits as a result. Okay. So, what exactly is devaluation? It is the... Actually, we should know that what exactly is devaluation. Devaluation of a currency is associated with countries having a fixed exchange rate regime. Devaluation happens mostly in countries with fixed exchange rate regime. Okay. And devaluation affects the value of a country's currency and it leads to fall in the value of a country's currency in terms of other currencies. However, the long-term impacts on the country's economy are very different in devaluation. Like, as I earlier told you, the devaluation of a currency associated with countries having a fixed exchange rate regime. Okay. And under the fixed exchange rate regime, the central bank, the central bank or the government decides the value of currency with respect to other foreign currencies. Here, the central bank of the government decides the value of the currency with respect to other foreign currencies. So, when the government or central bank reduces the value of its currency, then it is known as the devaluation of currency. So, what is happening here? The value of the currency is falling. How is it falling? Earlier, it was 1 dollar equals to 50 rupees. Now, 1 dollar equals to 60 rupees. That is why we call currency devaluation. So, it is frequent efforts by the government or the central bank of the country to lower down the value of the currency. Under this, the value of domestic currency is deliberately reduced in terms of other foreign currencies. For example, in 1966, when India was following the fixed exchange rate regime, fixed exchange rate regime, FER means fixed exchange rate regime. So, in 1966, when India was following fixed exchange rate regime, the Indian rupee was devaluated by 36 percent. How much? 36 percent. So, now, we will be discussing that what can be the reasons and objectives of the currency devaluation. So, first reason can be to increase the exports. Why? How it can lead to increase in the exports? Countries go for currency devaluation to boost their exports in the international market. And devaluation of currency makes it good cheaper. When they devaluate the currency, then their value in the international market is reduced. In other international competition tests, for example, China has reduced the value of its currency or devalued it. Why? So that its goods become less extensive and its goods extend more in the international market. And the most recent example of this is the trade war between US and China. What was that trade war? It was simply devaluation of currency for both the countries in order to gain trade preferences. So, this can and it can devaluation of the currency can also lead to the economic growth rate of the countries due to the higher exports and an increase in the aggregate demand and the economy. And second, it can also lead to competitive devaluation. What is competitive devaluation? Competitive devaluation means if a country is devaluing its currency, then another country will be motivated and they will say that they will do it too. We also need trade preferences and we need to make our product competitive in the international market. So, what will happen? China has devalued its currency and India and Sri Lanka and Brazil will do it too. What will this condition do? This condition will promote currency war. So, it is being said that currency devaluation, frequent currency devaluation leads to currency war and the devaluation of the currency also leads to reduction in the trade deficits because devaluation makes a country's exports cheaper while imports become more expensive. So, what will happen here? The export ratio will increase and the import ratio will decrease. So, what will happen? So, what are the disadvantages of currency devaluation? So, what are the disadvantages of devaluation? Disadvantages of devaluation are inflation as inflation can lead to increase in the inflation rate as essential imports such as oil. Oil is an essential import. Essential imports such as oil will become more expensive and it can lead to demand-full inflation. How will demand-full inflation be? How will demand-full inflation be? How will demand-full inflation be? So, let's assume that currency devaluation is okay and we need oil and people are demanding for oil but there is no demand in economy. There is no oil. We have to import from outside because we have restricted import. We have to export. So, demand-full inflation will increase. So, demand-full inflation reduces the purchasing power. How it reduces the purchasing power? It reduces the purchasing power of the country's citizens and foreign goods and foreign tools become extensive for them. The value of currency is decreasing here. How is it decreasing? It was $1.50. In the international market if you give more money then you will get less dollars. First, if you give more money then you will get less dollars. So, currency devaluation reduce the faith of international investors in the domestic economy. Large and quick devaluation of currency may reduce the faith of international investors in the domestic economy. Okay. So, now we will be discussing that what are the parameters used to put a country as a currency manipulator. An economy meeting two of the three criteria in the trade facilitation and trade enforcement act of 2015 it is an US Act. It is not an Indian Act. This is an US Act. So, an economy meeting two of the three criteria in the trade facilitation and trade enforcement act of 2015 is placed on the monitoring list. These criteria include a significant bilateral trade surplus with the US. One, that is at least $20 billion over a 12 month period. So, the first requirement is that if within a year the bilateral trade will go above $20 billion then the currency manipulator will go above. Second condition is a material current account surplus equivalent to at least 2% of GDP over a 12 month period. In one year if your current account surplus is 2% of GDP or more than that then the currency manipulator will go above. Third condition is that persistent one side intervention what it means when net purchases of a foreign currency totaling at least 2% of the country's GDP over a 12 month period are conducted repeatedly in at least 6 out of 12 months which means from 12 months to 6 months one side intervention which means 2% of the country's GDP foreign exchange or US dollar purchase if you meet these three conditions then the currency manipulator will go above. What are the two conditions first condition and third condition Once on the monitoring list and economy will remain there for at least two consecutive reports to help ensure that any improvement in performance versus the criteria is durable and not due to temporary factors means once you are on the monitoring list then you will have at least two consecutive reports whether you are doing it or not that's why so that the US Treasury can support and confirm that the efforts you are taking the measures you are taking in reality those are not temporary factors so what can be the possible reason behind US Releasing such as if the US currency manipulator is releasing the list then there will be some concern otherwise why would it why would it release the list of currency manipulator so what can be the possible reason the most prominent and most significant reason is Triffin Dilemma Triffin Dilemma is actually a conflict of economic interest conflict of economic interest Triffin Dilemma is a conflict of economic interest that arises between short term domestic short term D for domestic short term domestic and long term objectives and long term objectives and long term objectives of international achievement for countries whose currencies serves as a global reserve means that the US currency is a global reserve currency so due to that the US currency cannot develop for an exchange rate so its economic targets have to be managed on domestic demand and international pattern so it is being said that Triffin Dilemma is the most significant and prominent reason behind the US Releasing the currency manipulator list so now the question is why is India back in the monitoring list of currency manipulators if India was gone then again how it was listed now I have told you the reason behind it please read it again that India which has for several years maintained a significant bilateral goods trade surplus with US trade surplus with US crossed the 20 billion dollar according to the latest report and second condition says based on the central bank's intervention data India's net purchases of foreign foreign exchange accelerated notably in the second half of 2019 2019 ok so this condition India did not meet that the third condition says India sustained net purchases for much of the first half of 2020 which pushed net purchases of foreign exchange to 64 billion dollar for 2.4% of GDP over the four quarters to June 2020 so here India fulfills two of the three conditions which requires to be on the currency manipulators list so this is how India comes on the currency manipulator list ok so what can be the possible implications for India being putting on this currency manipulator list the possible implications for India can be we can say that India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other means India on the other hand does not increase the value of the currency and on the other hand takes care of its financial stability a traditional approach to India ok and India being on the foreign exchange operations it needs to pursue to protect financial stability means that RBI can restrict itself in foreign exchange operations so that it remains below 2% and third the two most obvious consequences could be an appreciating rupee if you are still depreciating your currency you are still depreciating your currency but now you have to appreciate your currency so what is appreciation appreciation is rising value of currency rising value of currency means if the price of one dollar first let's say exchange rate was 20 rupees so today's date now what will happen that the price of one dollar will be 10 rupees this is what we call appreciation what happens with appreciation less inflation ok and with appreciation more import because the value of currency increases so Indian policy makers have to be sensitive for the unpredictable nature of policy making in the US this is also very one dynamic aspect Indian policy makers have to be sensitive for the unpredictable nature of policy making in the US under Trump especially concerning global trade so now Joe Biden has been elected the President of the United States of America so certainly we can hope that at least there will be some stability in the policies so after discussing the whole topic now we should come back again to the question the question was consider the following statements currency devaluation is deliberate attempt of the market forces of the country to gain significant advantages in their operations and second the quaint currency devaluations can lead to currency wars so now which of the following are correct ok so read the question again currency devaluation is deliberate attempt of the market forces of the country to gain significant advantage in their operations it is not all deliberate attempt of market forces market forces have no role to play in this so this statement is wrong and second statement is frequent currency devaluation can lead to currency wars what China was doing in that case China was reducing its currency rate similarly US was also lowering its currency rate so what it leads to it will ultimately lead to currency war so the correct answer is too only so thank you so much for watching this video keep watching the video subscribe the channel don't forget to like share and subscribe to our channel and press the bell icon to never miss an update