RBI at end of rate cut cycle, onus of economic recovery is with govt now: SBI Research

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August 21, 2020 4:51 PM

RBI is at the end of its rate cut cycle amid high inflation and the onus of economic recovery has now shifted to the government.

SBI Ecowrap Report, economic recovery, repo rate, interest rates, economic downturnThe fiscal policy should play a decisive role if the economy has to see a fast-paced recovery.

A day after the Reserve Bank of India released the minutes of the latest Monetary Policy Committee meeting, the economists at SBI said that RBI is at the end of its rate cut cycle amid high inflation and the onus of economic recovery has now shifted to the government. The economists added that the fiscal policy should play a decisive role if the economy has to see a fast-paced recovery, SBI said in its Ecowrap report. Earlier this month, the Reserve Bank maintained the status quo on the repo rate citing high inflation emerging from the ongoing disruptions in the economic activities. 

The report further said that expectations of large rate cuts must be anchored as inflation is unlikely to decline materially from the current level and at best there can be a 0.25 per cent more of rate cuts in offing. It also underlined that the minutes of the MPC meeting reveal the conundrum in the context of current extremely weak growth impulses and a jump in inflation. Highlighting the fastest rate transmission and restoring financial stability within a quarter by the RBI as the notable achievements in FY21, the SBI research report said that it would better serve the financial markets if RBI continues to resort to unconventional policy measures. 

Also Read: Khadi, village industry take PM’s job scheme flying; projects soar after Modi makes approvals easier

Meanwhile, RBI Governor Shaktikanta Das had said that despite a headroom for further monetary policy action, some more time should be given to the cumulative 250 basis points cut in the policy rate to seep into the financial system and further reduce the interest rates. Hence, he wanted to keep the arsenal dry and use it judiciously. The MPC highlighted that on the domestic front, economic activity had started to recover, however, surges of fresh infections have forced re-clamping of lockdowns in several cities and states, which led several high-frequency indicators to level off. Retail inflation soared to 6.93 per cent in July, against a revised 6.23 per cent in June. 

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