Recently, Indian GDP for June 2020 Quarter printed -23.9% growth. Interestingly, just a few weeks before this print, RBI Monetary Policy Committee announced that it was holding rates steady because Consumer Price Index (CPI) inflation was at 6.93%, outside the target range of 2% to 6%.
Mr. Dhuri in his recently published article titled “Guiding policymaking through the fog of Covid19 induced lockdowns” questions the underlying logic of keeping the interest rates steady while we have strong degrowth, disrupted supply, and non-demand driven inflation in the economy. He also talks about how the Taylor rule of monetary policy can be used as a guide in this scenario. Running the numbers using the Taylor rule presents us with some interesting finding for the March 2021 policy rates and highlights the fact that India may need a 250 basis points rate cut in the next seven months
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