INDIA FLAGS GLOBAL CURRENCY WAR RISKS
India’s central bank raises interest rates to highest in two years to shore up rupees
INDIA’S central bank governor raised the prospect of global currency wars as he led policymakers in raising interest rates to the highest in two years to shore up the rupee and tackle inflation pressures in the world’s fastest-growing major economy.
After delivering the first backto-back rate increase since the monetary policy committee came into being in September 2016, Reserve Bank of India (RBI) governor Urjit Patel said he is seeking to maintain economic stability amid growing risks from global trade and currency tensions.
“We have had a few months of turbulence behind us,” said Patel. “This is likely to continue and 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.”
The RBI’s rate move follows emerging-market counterparts in Indonesia, the Philippines and elsewhere who are trying to counter currency routs and inflation risks triggered by a strong dollar and higher United States rates. The Federal Reserve left borrowing costs unchanged on Wednesday but stuck with a plan to gradually tighten policy in coming months.
The rupee is Asia’s worst performing major currency this year, down 6.6 per cent against the dollar, and is vulnerable to a slump in the yuan amid China’s ongoing trade tensions with the US.
The rupee gained 0.1 per cent to a nearly two-week high of 68.3488 against the dollar on Thursday, a day after five of the six members of the rate-setting panel voted to raise the repurchase rate by 25 basis points to 6.5 per cent.
Currency and inflation woes aside, the economy is growing faster than any other major nation, strengthening Prime Minister Narendra Modi’s position as he prepares for elections next year. But risks to the outlook are formidable: as the world’s fastest-growing oil consumer, higher crude prices will push up the current-account deficit, while global trade tensions threaten exports and investment.
Inflation has been running well above the central bank’s medium-term target of four per cent, with the outlook set to worsen because of oil prices and currency weakness.
“Given this, we have to ensure we run a tight ship on the risks we control to maximise the chances of macro-economic stability,” said Patel.