Near end of rate cut cycle, over to govt: Report

High inflation could result in a more moderate easing of rates by the monetary policy committee (MPC) of the Reserve Bank of India.

The RBI would do well by continuing to resort to unconventional policy measures in the current circumstances to ensure financial stability, a research report from the State Bank of India said.

According to Soumya Kanti Ghosh, group chief economic adviser at SBI, we are the end of the rate cut cycle and expectations of large rate cuts must be anchored (ideally 25, best case 50) as inflation is unlikely to decline materially from current levels.

“We believe it would better serve the financial markets if RBI continues to resort to unconventional policy measures as it has been significantly able to reduce the long and variable lags of monetary policy (fastest rate transmission and restoring financial stability within a quarter has been the notable achievements in FY21 by RBI in the current rate cut cycle that began from March’20),” said Ghosh.

“Fiscal policy should play a decisive role, if we have to nurture any hopes of a fast paced recovery! We believe from here on if fiscal policy does not play an active role, next change in monetary policy decision could throw a surprise whenever it comes by distinctly favouring change in policy stance over policy strategy / liquidity regime. The other monetary policy alternative could be to reduce the width of the asymmetric policy corridor / increase in reverse repo rate when the pandemic subsides,” added Ghosh in his report.

The comments come a day after the minutes of the central bank’s interest rate-setting panel meeting of August 4-6, published on Thursday, showed its members have turned more hawkish over inflation, ruling out further rate cuts. The minutes revealed the conundrum the MPC was facing in the context of current extremely weak growth impulses and a jump in inflation.

RBI governor Shaktikan-ta Das suggested giving it time for past interest rate cuts to take effect. “I also feel that we should wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads. Given the uncertain inflation outlook, we have to remain watchful to see that the momentum in inflation does not get entrenched, which is also dependent on effective supply-side measures," Das said.

The SBI economist said that inflation which came at 6.9 per cent for July could be sticky because his 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, he added.