RBI Governor Urjit Patel warns of global currency war

The Reserve Bank of India Governor Urjit Patel on Wednesday warned global protectionism may snowball into a currency war and impact growth prospects.

“We have already had a few months of turbulence behind us and it looks like it is likely to continue. For how long, I don’t know. But the trade skirmishes have evolved into tariff wars and now we are possibly at the beginning of currency wars,” Patel said at the post policy briefing.

Separately, the monetary policy statement too sounded caution on escalating trade protectionism.

“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,” the statement said.

In the recent months, trade protectionism through tariff and non-tariff barriers has escalated with US President Donald Trump's administration's quest to save US industries and lessen deficits with other countries. But the move has evoked retaliatory measures by countries like China and even India which have raised duties on most of the imports.

The next step could be devaluation of currencies by emerging economies in order to give a leg up to their foreign trade. This could lead to a currency war.

Inflation at 4.8%

The RBI pegged retail inflation at 4.8% for the second half of current fiscal expecting increase in food prices due to hike in minimum support price (MSP).

For the July-September quarter, it has projected inflation to be at 4.6%.

RBI made the projections in its third monetary policy review for the current fiscal.

Retail inflation has been projected to rise further to 5% in the first quarter of next financial year 2019-20.

"This increase in MSPs (minimum support prices) for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation," RBI said in its third bi-monthly policy review.