Policy

Let the economy run ‘hot’ for a few quarters: Barclays

Our Bureau Mumbai | Updated on March 30, 2021

The Reserve Bank of India (RBI) may maintain its monetary accommodation for a while longer in order to enable the recovery to become entrenched, according to a Barclays report

The Reserve Bank of India (RBI) may maintain its monetary accommodation for a while longer in order to enable the recovery to become entrenched, according to a Barclays report.

The report, “Monetary policy: Talking the walk”, observed that recovering output lost to the pandemic could take longer than anticipated, and policy makers will be best served by letting the economy run ‘hot’ for a few quarters.

“The RBI will also need to balance nurturing the recovery and financial stability risks. Estimates show that the output gap will be negative well into 2022, and we believe monetary accommodation will be required to support growth recovery,” Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, said.

Monetary policy: Talking the walk

The report underscored that RBI will need to step up its communication game to ensure that markets are on board with its programme even as it contemplates an exit from its highly accommodative monetary policy conditions.

The authors observed that the recent steepening of India’s rates curve suggests doubts linger regarding whether the central bank can execute without a policy misstep.

Also read: Monetary policy framework: Signals so far suggest no change in inflation target

“The upcoming April 7 monetary policy meeting presents RBI with a great opportunity to bridge the communication gap, and to convince market participants of its intent through actions,” they added.

The authors believe the RBI will likely adopt a very gradual process of normalisation, augmented by moral suasion.

“Communicating an eventual exit from extraordinary accommodation will be a challenging exercise with multiple stages. CRR (cash reserve ratio) normalisation has already begun, and it will be followed up with removal of enhanced forward guidance, increase in reverse repo rates to a ‘normal’ policy rate corridor of +/-25 basis points, followed by an eventual rate hike in Q2 2022 at the earliest, in our view,” said Bajoria and Sodhani.

Published on March 30, 2021

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