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Informist, Friday, Nov. 22, 2024

--RBI Patra: Monetary policy micromanaging CPI expectation counterproductive 

--RBI Patra: Forward guidance efficacy questionable at higher rates

MUMBAI – The effectiveness of forward guidance when policy rates are very low is clearly established, but its success at higher rates is uncertain, Reserve Bank of India Deputy Governor Michael Patra said at the "High-Level Policy Conference of Central Banks in the Global South". He said evidence from India indicates that during a cycle of policy tightening, forward guidance tends to weaken once the policy rate surpasses a certain limit.

Patra said the optimal level of communication by the central banks remains a gold standard and is not easy to achieve. Too much communication can create difficulty for market participants to figure out what is relevant and what is not and too little communication can keep the markets guessing, he said.

Although monetary policy must address inflation expectations, micromanaging them could be counterproductive, Patra said. In a tightening cycle, forward guidance is limited, but acknowledging this in communication could undermine the policy's intended effects, he said.

Talking about how the RBI communicates monetary policy, Patra said the strategy evolves constantly. Patra said the RBI chose to avoid forward guidance throughout the period of tightening amid increased global uncertainty and simultaneous shocks, because it believed that providing a forward guidance could contribute to policy uncertainty, thereby weakening the credibility of its policies.

Additionally, empirical data indicates that forward guidance likely played a significant role in alleviating uncertainty and bolstering asset prices during the early phases of COVID-19, Patra said. This highlights the crucial function of communication in shaping market expectations in India regarding the monetary policy approach, including anticipated movements in policy interest rates, he said.

A paper titled 'Dynamic Landscape of Monetary Policy Communication in India' in the RBI's bulletin for October also talked about the central bank's communication and forward guidance and came to a similar conclusion that the impact of communication is observed to be higher during the tightening phase.  End

Reported by Kabir Sharma

Edited by Ashish Shirke

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