The unwinding of easy money policies must be accompanied by careful communication, as views of some segments of the market are not aligned with those of the central bank, Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday.
Das said that for the RBI’s crisis measures announced with pre-specified terminal dates, market expectations remained anchored and communication challenges were minimal when these measures got automatically withdrawn. “On the other hand, measures or unwinding of open-ended policies, as and when they happen, would require careful, nuanced and measured communication as, in such instances, the expectations of certain segments of the market may not be in sync with that of the central bank’s assessment,” he observed.
Monetary policy is not merely a science where some instruments are tweaked to achieve an objective, Das said while delivering a lecture at the National Defence College, New Delhi. He said it is also an art of creating new instruments and taking policy calls in response to anticipated and evolving challenges and communicating them with prescience and clarity, especially during crisis times.
Das’ comments come at a time when some commentators are seeing the RBI as having been too slow to react to rising inflation. External member of the monetary policy committee (MPC) Jayanth R Varma has said that the delay in the rollback of accommodation is putting the credibility of the RBI and the MPC at risk. Inflation based on consumer prices inched past the MPC’s target band of 4+/-2% in January 2022 to 6.01%. Rising oil prices amid the war in Ukraine has led to fears of inflation rising even further.
The current global conditions, after about two years of living through the pandemic, are now posing complex challenges for central bank communication, Das said. “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,” he added.
Das emphasised that the RBI has been different from other central banks in its pandemic response. First, it has undertaken unconventional measures even before exhausting the conventional policy space, that is, before reaching the zero lower bound of interest rates. Second, the counterparties involved in the RBI’s operations were only banks and all India financial institutions (AIFIs) as liquidity provided to targeted sectors were channelised through them. Third, the RBI confined its asset purchase programme to central and state government securities and did not dilute its collateral standards in its lending operations, unlike many other central banks.
Fourth, most of the RBI’s measures were announced with pre-set terminal dates instead of being open-ended, which has reinforced the credibility of the announcements. Fifth, while stating and in facilitating the ”evolution of the yield curve as a public good”, the RBI has solely operated in the secondary market unlike some inflation targeting emerging market central banks that made emergency provisions to operate in the primary market to finance the government directly.
Sixth, the RBI has continued with the accommodative stance based on India’s domestic growth-inflation dynamics, amidst current divergence in policy actions of central banks across the world.
“Thus, we have used the flexibility embedded in the FIT (flexible inflation targeting) framework and implemented our monetary policies, without compromising on our primary mandate of price stability,” Das said.
