RBI at end of rate cut cycle, govt needs to play decisive role for eco recovery: SBI economists

PTI, Aug 21, 2020, 3:49 PM IST

Mumbai: The Reserve Bank is at the end of its rate cut cycle as inflation is unlikely to decline materially from the current level, and the onus of economic recovery has now shifted to the government, economists at SBI said on Friday.

The comments come a day after the release of the minutes of the latest meeting of RBI’s Monetary Policy Committee, where high inflation was cited as the prime reason for the unanimous decision to hold rates.

The Reserve Bank of India (RBI) had cut rates by 1.15 per cent in two moves since the onset of the pandemic in March this year in order to push economic growth, but surprised many by holding on to rates at the August review as inflation overshot its target.

“Fiscal policy should play a decisive role, if we have to nurture any hopes of a fast-paced recovery,” economists at SBI said.

“We now believe that we are at the end of the rate cut cycle and expectations of large rate cuts must be anchored as inflation is unlikely to decline materially from current level,” the SBI economists said, hinting that at best there can be a 0.25 per cent more of rate cuts in offing.

If RBI continues with unconventional policy measures it would help the financial markets because it has been significantly able to reduce the long and variable lags of monetary policy through successes like fastest rate transmission and restoring financial stability, it said.

With no rate cuts on the table, the other monetary policy alternative could be to reduce the width of the asymmetric policy corridor or increase in reverse repo rate when the pandemic subsides, they opined.

The SBI economists said they feel inflation – which came at 6.9 per cent for July – could be sticky because their estimates show that the large procurement by the government may have resulted in 0.35-0.40 per cent upward impact.

The supply chain disruptions are showing no signs of abating and have played a spoilsport across several states, they added.

The economists also endorsed the Monetary Policy Committee’s call for a change in computing inflation to a practice adopted by developed markets.

“We plead with the National Statistical Office (NSO) to fix the broken CPI methodology that is playing havoc with policy decisions.

“The minutes of the MPC meeting make a forceful case for shifting to a chain-based price index for measuring price level, as is the practice in most developed countries given the change in consumer preferences,” they said.

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