RBI Governor Urjit Patel raises currency war flag

Reserve Bank of India (RBI) agreed with the government that the Indian economy would grow at 7.4% for 2018-19 but has different views on inflation. RBI governor Urjit Patel did not think it is time to take his feet off the pedal in the rate-hike cycle, while the government was satisfied with the pace of inflation. After October 2013, it is the first time that RBI has gone for a consecutive rate hike.

The hike in the repo rate, or the rate at which RBI lends to banks, comes after the consumer price index (CPI) based inflation shot up to 5% in June, up from 4.8% in May.

The central bank said it was concerned about inflation with lurking uncertainty about oil prices, possibility of a trade war and fiscal slippages in an election year.

Urjit Patel, RBI governor, said in a media conference, “There is a fair bit of uncertainty around CPI prints going forward. Therefore, it was important that we kept our options open, depending on the prints coming over the next few months, given the volatility of the prints that seem to be coming most of the time.” The government, on the other hand, has been easy on inflation, saying that retail inflation remained around the target of 4% with a 2% tolerance level.

Patel reiterated that “Our mandate is to target the headline. Therefore, while we look at the components that make up the headline. Our focus in terms of the policy choices is to get the headline to 4%.”

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“We have 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. The trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars,” Patel told media persons. “Given this, we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macroeconomic stability and continuing with the growth profile of 7-7.5%, going forward,” he said.

Source: DNA Money