RBI governor Shaktikanta Das said too much of communication can confuse the market, too little may keep it guessing about the central bank’s policy intent, hence the central banks need to communicate efficiently and effectively in order to convey monetary policy signals.
Reserve Bank of India Governor Shaktikanta Das said Friday that global uncertainties have left central banks around the world confused whether they should tweak policies aggressively or gradually. “Central banks are in a bind – if they act aggressively to contain inflation which may perhaps subside as normalcy returns, they run the risk of setting in recession; on the other hand, if they act too little and too late, they may be blamed for “falling behind the curve” and may have to do a lot of catching up later which will be detrimental to growth,” Das said at an event.
Ostensibly referring to the crisis in Ukraine, Das said recent geopolitical developments have aggravated the challenges and dilemmas for global central banks and they are increasingly facing challenges in communicating their view. “Meanwhile, financial markets world over have turned extremely volatile as they have been left grappling with heightened uncertainty over the pace of future monetary policy normalisation,” he added.
The RBI governor also said monetary policy is an art of managing expectations, and central banks have to make continual efforts to shape and anchor market expectations. The RBI Governor also said too much of communication can confuse the market, too little may keep it guessing about the central bank’s policy intent, hence the central banks need to communicate efficiently and effectively in order to convey monetary policy signals. “As monetary policy is an art of managing expectations, central banks have to make continual efforts to shape and anchor market expectations, not just through pronouncements and actions but also through a constant refinement of their communication strategies to ensure the desired societal outcomes,” he added.
RBI governor’s comments come a day after US Federal Reserve Chair Jerome Powell took the uncertainties posed by conflict between Russia and Ukraine into account and said that he will back a 25 basis points hike in the upcoming monetary policy meeting of the Fed. “The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell told lawmakers Wednesday. “Given the current situation, we need to move carefully,” he added.
RBI, on the other hand, proposed an accommodative stance in the February meeting and said it will support growth of the economy as long as necessary and will communicate its policy in a well-calibrated and telegraphed manner.
RBI Deputy Governor Michael Patra said in an interview last month, “I think the perception (that India has fallen behind the curve by retaining an accommodative monetary policy when other economies are either tightening monetary policy or announcing normalisation) is unfair because every judgment must be based on facts.” He said that the fast pace of policy normalisation may “kill recovery” adding that inflation peaked in January and will fall from here on. Economists expect the central bank to move faster from a dovish approach to a neutral one in upcoming meetings and act to rein-in the risks from global uncertainties.
Also read: Inflation may push RBI to harden stance, raise policy rates, while US Fed scales back rate hike expectations
