RBI warns of currency war, hikes rate to cut risk

Mumbai, Aug 1 : The Reserve Bank of India on Wednesday warned of a global currency war on rising trade tensions and said it did not want to add to the risk profile of India's growth as it hiked its key lending rate by 25 basis points to 6.5 per cent.

"We already had a few months of turbulence behind us and it looks like that this is likely to continue. For how long, I don't know. But the trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars," RBI Governor Urjit Patel said at a press conference after a meeting of its monetary policy committee.

Lately, a slew of trade protectionist measures initiated by major economies led by the US has impacted international business sentiment and resulted in retaliatory tariff wars. Further, there is also a fear of China devaluing its currency to boost its exports at the cost of other countries.

"Given this we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macro economic stability and continuing with the growth profile of 7 per cent to 7.5 per cent going forward. We do have things that are in our favour and if we continue along that path we ensure that we don't add to the global risk profile that would adversely affect us," Patel said.

Last month, Commerce Minister Suresh Prabhu noted that the global trade is passing through "challenging times" and the existence of World Trade Organisation (WTO) was under threat.

The RBI in its monetary policy statement observed: "Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth." 

According to Patel, apart from rising trade tensions, other risks like higher crude oil prices and an upward inflation trajectory might also impede India's growth rate which he expects to grow at 7.4 per cent in 2018-19.

Patel's cautionary note came after the RBI's Monetary Policy Committee (MPC) voted to raise the apex bank's key benchmark lending rate by 25 basis point to 6.5 per cent in the third monetary policy review of 2018-19 on Wednesday.

"The main reason for changing the policy rate is to ensure that on a durable basis we come to and maintain the 4 per cent (inflation) target. And, we have been away from the 4 per cent number for several months now," Patel said and added that the central bank retained the neutral stance as risks around the projections were on both sides, that is balanced.