NEW DELHI: Noting that the past thirty years have seen a statistically significant negative correlation between the policies of the Reserve Bank of India (RBI) and the central government, a report from SBI Research on Monday said that such coordination would be vital to contain and recovery from the current economic crisis.

According to the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, with the economy ravaged by pandemic, the government is “very much wary of a fiscal splurge”. 

“The RBI has been largely successful in communicating to the market about its intentions and seems to have managed the art of managing expectations much better. In fact, RBI Governor has politely conveyed the message of steadfast resolve of monetary policy support through crisp one liners, the effectiveness of what was discussed in Jackson Hole meeting in Aug’20!,” said the report, adding that the underlying message was that central banks should be constructively imprecise, rather than being detailed. 

“We now expect the government to manage expectations with a coordinated communication and leave matters of financing the fiscal deficit through specific measures like monetisation to RBI,” the report further added. The bank had arrived at this conclusion through an application of economic game theory.

“We assume that both the government and RBI have 2 options between them, either a contraction or an expansion. Subsequently, we construct the payoff matrix, where the payoffs are hypothesized as benefits accruing to the government and RBI separately when they are deciding on either of the policy options: contraction and expansion,” it explained. According to Ghosh, the government must complement RBI in terms of a coordinated inequilibrium strategy by adopting simultaneously an expansionary monetary and fiscal policy.