Inflation Risk Could Mean End Of RBI's Rate Cut Cycle: SBI Economists

On Friday, economists at the State Bank of India (SBI) said that the Reserve Bank of India (RBI) 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.

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.

Since the onset of the coronavirus pandemic, the central bank has cut its repo rates twice by 1.15 percent bringing it down to 4 percent to push economic growth in the country. However, in the August review of the monetary policy, rates were left unchanged amid the high number of infection as inflation numbers surpassed 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," they added.

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 percent for July, could be sticky because their estimates show that the large procurement by the government may have resulted in 0.35-0.40 percent upward impact.

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.