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RBI, govt should work together for economic recovery: SBI research

Even as the economy sees negative impact of the coronavirus pandemic, a coordination between the Reserve Bank of India (RBI) and Ministry of Finance becomes significant, a report said

twitter-logoBusinessToday.In | September 7, 2020 | Updated 20:20 IST
RBI, govt should work together for economic recovery: SBI research
Reserve Bank of India

Even as the economy sees negative impact of the coronavirus pandemic, a coordination between the Reserve Bank of India (RBI) and Ministry of Finance becomes significant, a report said. However, there has been a statistically insignificant negative correlation between the two in the 30-year period ended FY20, according to SBI's Ecowrap research report.

A negative correlation between the central bank and finance ministry, historically, implies "least coordinated policies, even as RBI had successfully staved off automatic monetisation and even the private placement of fresh issues with RBI, with the enactment of FRBM in 2003."

But, the RBI has been largely successful in communicating to the market about its intentions and seems to have managed expectations much better, the SBI Research report said.

"We now expect the government to manage expectations with coordinated communication and leave matters of financing the fiscal deficit through specific measures like monetisation to RBI," the report also said.

In Q1FY21, the GDP had contracted 23.9 per cent, the worst fall in the last 40 years, due to coronavirus induced lockdowns which brought the economy to a standstill.

In its recent research report, SBI had said that fiscal policy should now play a decisive role in ushering in a fast paced recovery. "We believe from here on if fiscal policy does not play an active role, the 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 had 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," it had also said.

Also read: Raghuram Rajan on economy: GDP fall 'alarming'; India needs stimulus now, not later

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