Fiscal policy should now play a decisive role in ushering in a fast paced recovery, said SBI Ecowrap in a report issued on Friday.
“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 or liquidity regime,” the report said.
“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.”
The report was issued after the RBI released the minutes of the last MPC meeting in which members voted to maintain the key lending rate due to rising inflation.
“We now believe that we are at 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).”
As per the report, large procurement by the government may have resulted in 35-40 bps upward impact on inflation and the supply chain disruptions that show no signs of abating, have only played spoilsport across several states.
On August 6, to curb the rise in inflation, and stabilise the general economic environment, the Reserve Bank’s MPC had voted to retain the key short-term lending rates, but maintained the growth-oriented accommodative stance.
The MPC of the central bank maintained the repo rate — or short-term lending rate for commercial banks, at 4 per cent.
Likewise, the reverse repo rate stands unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.25 per cent.