
Shaktikanta Das, Governor of the Reserve Bank of India, stated on Friday that “monetary policy is an art of managing expectations,” emphasizing the importance of a good communication strategy in the face of increased inflationary pressures fueled by geopolitical developments. Monetary policy has changed significantly in India and throughout the world, as economies and markets have matured and policymakers have gotten more insights into how economic actors interact in a complex economic system, he said during a speech at the National Defence College here.
“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 said.
While too much information might mislead the market, too little information can leave the market wondering about the central bank’s policy goal, he noted.
The central bank also recognizes that information must be accompanied by matching actions in order to develop credibility and instil wider trust in the policy.
According to Das, the Reserve Bank of India (RBI) has actively used communication through a variety of tools to anchor expectations, including MPC resolutions and minutes, exhaustive post-policy statements along with a statement on developmental and regulatory measures, press conferences, speeches, and other publications, particularly the biannual Monetary Policy Report (MPR).
The governor stated that under the legislation, price stability is defined mathematically as a target of 4% for the headline Consumer Price Index (CPI) with a +/-2% tolerance margin around it. The FIT regime’s flexibility stems from measures to accept or see-through transient supply-side inflation spikes.
Failure to meet the monetary policy objective is defined in terms of average headline CPI inflation remaining lower or higher than the 2 to 6 percent band for three consecutive quarters, rather than any instance where inflation exceeds/falls below the target. This helps monetary policy to avoid undue volatility in rate-setting behaviour that may adversely impact growth,” he said.
“The clearly defined inflation target and the band, the setting up of the MPC, the explicit accountability mechanisms for defining failure in meeting the target, the detailed resolution and the quick release of individual assessments in the minutes have strengthened transparency and credibility of monetary policy formulation in India,” Das said.
Retail inflation in January exceeded the Reserve Bank of India’s upper tolerance range of 6.01 percent, compared to 5.66 percent in December 2021. The increase was mostly due to rising food inflation, which reached a 14-month high of 5.43 percent, as well as an unfavourable starting point.
After nearly two years of dealing with the pandemic, Das said the present global conditions were providing complicated problems for central bank communication. According to him, a number of economies, including the big ones, are confronting multi-decadal high inflation as a result of supply disruptions, tighter labour markets, the fragility of just-in-time inventory management, and geopolitical shocks.
“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,” it said.
Meanwhile, he claims that financial markets throughout the world have become very volatile as a result of increased uncertainty about the speed of future monetary policy normalization.
“Recent geopolitical developments have further aggravated the challenges and dilemmas for the central banks. Amidst these uncertainties, central banks have to find the optimal grounds with attendant communication challenges,” he added.
When asked about the steps taken to combat the epidemic, Das stated that the RBI’s response was swift and resolute.
Since March 2020, almost 100 actions have been taken. Furthermore, MPC meetings were held ahead of schedule on two occasions — March and May 2020 — and the governor made two other standalone statements outside the Monetary Policy Committee (MPC) cycle — one in April 2020 during the early days of the COVID-19 crisis and the other in May 2021 during the peak of the second wave, he said.