RBI monetary policy: We may be on the verge of currency war, says Patel

Advising caution on global trade wars leading to currency friction, Reserve Bank of India Governor Urjit Patel on Wednesday said India was better-prepared face the fallout of it. 

The country will have to take prudent steps not to add to global risks, which can be adverse for it.

“We have already had a few months of turbulence behind us and it looks this is going to continue, for how long I do not know. But the trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars,” Patel told the media on the RBI’s preparation to maintain stability.

In his media interaction after the monetary policy review, the governor said: “We run a tight ship on the risks that we control to maximise the chances of ensuring macroeconomic stability and continuing with a growth profile of 7 to 7.5 per cent.”

“There are some things that are in our favour. If we continue along that path we ensure that we do not add to the global risk profile that will adversely affect us,” Patel said.

Madan Sabnavis, chief economist, CARE Ratings, said currency and trade wars were not in control of the central bank. However, taking steps to maintain stability is within the bounds of its control. 

While there is no immediate worry, foreign currency reserves are down by $19 billion since the end of March. There is worry on the balance of payments (BOP) front owing to a widening current account deficit. Foreign portfolio investors (FPI) have taken out substantial investment from the Indian markets, he said.

India’s foreign exchange reserves could go below the $400-billion mark. However, experts say this in itself should not be cause for concern.

The accumulation of reserves happened through portfolio flows, and now that those flows have reversed, putting pressure on the currency, the central bank is right in giving up some of its accumulated reserves defending the rupee, said market experts and economists.

India’s forex reserves peaked at about $426 billion in mid-April. Since then, it has come down to $405 billion in the week ending July 20, the data from the Reserve Bank of India (RBI) shows. There’s another $10-11 billion worth of forward position of the RBI, which is not counted in the reserves, but can be used to intervene in the market.

The forex reserves were accumulated due to portfolio flows. As dollar money flew into local equities and debt, the RBI kept buying the flows, so that the rupee did not strengthen too much.

Rating agency CRISIL in its report just before policy review said the impact of external shocks depends on their magnitude and the economy’s ability to face it. While the oil price shock is a known devil with perceptible impact on current account deficit (CAD) and inflation.

The CAD slid from 0.1 per cent beginning fiscal 2017 to 1.9 per cent end fiscal 2018, plumbing 2.5 per cent in between. The most prominent and inevitable risk of these shocks is on the CAD and its financing. Since India is a net importer of oil, higher oil prices straightaway fuel the merchandise trade deficit. 

Besides, the trade wars (by pulling exports and/or pushing up the import bill) could widen the non-oil trade deficit which is already at levels higher than in fiscal 2013, when the CAD was at its peak, it added.