At $1.6 trn a day, EM currency trading outpaces peers, rupee deals double

Currencytrading grew at a faster pace in emerging markets than developed nations over the past three years, boosted by an increase in automated buying and selling as well as demand for riskier assets, according to the Bank for International Settlements.
Developing-nation currencies accounted for 23% of trading in the global foreign-exchange market in April, up from 19% in 2016 and 15% in 2013, the Basel, Switzerland-based institution said in its quarterly review. Average daily turnover jumped about 60% between April 2016 and April 2019 to almost $1.6 trillion, according to the BIS, which fosters cooperation between central banks.

In early 2016, emerging-market currencies began a two-year rally that took MSCI Inc.’s gauge to a record as investors sought higher-yielding assets. Concern over the impact of a trade war between the U.S. and China has since dented some of those gains.
The diversity of market participants also contributed to growth in emerging-market currency trading, according to the BIS. Automated trading, in particular high-frequency activity, has made over-the-counter markets more attractive to those engaged in such strategies, including hedge funds and principal trading firms, it said.
There’s been “growing investor appetite for riskier higher-yielding assets typically associated with emerging markets,” said Stephen Innes, chief Asia market strategist at AxiTrader in Bangkok. “Out of necessity, the emerging-market space has developed incredibly, with many platforms, banks and electronic communication network brokers filling a huge void that was pretty much the domain of voice traders and subject to crazy spreads not too long ago.”
Electronic activity also boosted the market for non-deliverable forwards, the BIS said. NDFs are often used by investors to bet on the direction of a currency and are typically traded in offshore financial centers. Despite continued restrictions on their convertibility, NDF trading in the Indian rupee, Indonesian rupiah and Philippine peso more than doubled, the BIS said.

Why chances of India being named a currency manipulator are slim

India made a surprising entry on the US Treasury's currency watchlist last week, but it's some way from being labeled a manipulator of the rupee.
The Treasury cited India's “significant” trade surplus with the US and increased purchases of foreign currency last year as reasons for increased scrutiny of the Asian economy. Taiwan and Thailand, both of whom run significant current account surpluses and whose central banks have actively intervened in currency markets, weren't added to the list.

A spokesman for India’s central bank declined to comment on the Treasury report, which identifies three criteria to label a country as a currency manipulator: a bilateral trade surplus of at least $20 billion, a current account surplus of 3 percent of gross domestic product or more, and foreign exchange intervention of at least 2 percent of GDP in the past year.
"There is very little chance that India will meet all three criteria and be called a manipulator, as it has persistently been running current account deficits since 2005," Khoon Goh, head of Asian research at Australia & New Zealand Banking Group Ltd. in Singapore, wrote in a note on Monday.
Here’s how India measures up to the Treasury's criteria:
Bilateral Trade Surplus
India’s bilateral trade surplus --merchandise and services-- with the U.S. stood at $28 billion in 2017, according to the Treasury report. The surplus is marginally lower than the $30.8 billion in 2016, according to data from the Office of the U.S. Trade Representative. India’s goods trade surplus with the U.S. stood at $23 billion in 2017, exceeding the Treasury’s threshold.
While India meets this criteria, its addition to the currency watchlist list comes at a time when trade relations between Asia’s third-largest economy and the U.S. are under strain. India raised tariffs on a number of imports in its budget presented in February, while the U.S. has approached the World Trade Organization against India’s export subsidy program apart from threatening tit-for-tat reprisals on tariffs.
Current Account Surplus
Although India enjoys a trade surplus with the U.S., overall the South Asian nation runs a deficit. It’s also been running a current account shortfall for more than a decade and hence fails to meet this criteria.
The gap was at $13.5 billion in October-December, or 2 percent of gross domestic product.
While India needs steady inflows to help bridge the deficit, foreign investors turned net sellers of stocks in December after buying in October and November. Their inflows into both bonds and stocks have been slowing in 2018, raising the risk of a significantly large current account deficit. A Bloomberg survey showed economists forecasting the deficit to widen to 2.5 percent of GDP by the fourth quarter of 2018.
Divya Devesh, Asia FX strategist at Standard Chartered Plc in Singapore, said it is likely that India will drop off the monitoring list in the coming year, given a probable widening of the current-account deficit and more modest capital inflows reducing reserves accumulation.
Currency Intervention
India has seen large foreign exchange inflows over the past few years given the relatively high yields on its assets and a pick up in foreign direct investment. That’s enabled the Reserve Bank of India to build reserves to more than $420 billion.
The central bank conducted net purchases of foreign exchange to the tune of $56 billion in 2017, including activity in the forward market, the Treasury report said. This is equivalent to about 2.2 percent of GDP.
The RBI’s policy stance has been that it steps in to curb excess volatility but not to manage the rate of exchange.
The currency has come under pressure this year and is down 2.4 percent against the dollar since the beginning of January. Being included on the Treasury’s monitoring list will probably mean the central bank will give freer rein to the rupee.
“There could be pressure for the RBI to ease off on their FX intervention,” ANZ’s Goh added.