Maintaining overall stability, which includes sustained growth, price stability and financial stability, is a daunting challenge for the countries of the Global South, according to RBI Governor Shaktikanta Das.
He observed that maintaining overall stability is challenging amidst global spillovers, external sector imbalances, limited fiscal space, elevated debt levels and continuing financial market volatility.
Central banks need to work towards more robust, realistic and nimble policy frameworks that use monetary, prudential, fiscal and structural policies synergistically to achieve better societal outcomes, Das said in his keynote address at the “High-Level Policy Conference of Central Banks from the Global South: Building Synergies.”
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In his opening remarks on “Communicating Monetary Policy”, Michael Debabrata Patra, Deputy Governor, said assessments based on a text-mining approach indicate that the degree of transparency on how the RBI communicates monetary policy has been progressively enhanced, especially after the adoption of the flexible inflation targeting (FIT) framework.
“Coincident survey-based information adjusted for biases such as backward-looking price assessment, overall sentiments about the economy and the impact of prices of salient items on overall perceptions shows that inflation expectations have also become anchored, and they do track realised inflation. This suggests that monetary policy awareness among the lay public is increasing,” Patra said.
The Deputy Governor underscored that unlike some central banks in advanced economies, the RBI has generally refrained from providing explicit forward guidance on the policy rate, although it has provided both time- and state-contingent forward guidance during the COVID-19 pandemic.
“During the policy tightening cycle amidst heightened global uncertainty and overlapping shocks, the RBI was of the view that forward guidance itself could be a source of policy uncertainty undermining policy credibility.
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“Accordingly, it refrained from forward guidance in the policy tightening cycle. Nonetheless, the RBI has emphasised on clarity in communication, while maintaining a balance between both high and low frequency communication of monetary policy,” he said.
Patra observed that the optimal level of communication remains the gold standard for all central bankers – too much can create a “signal extraction problem” while too little can keep the markets guessing.
While monetary policy needs to manage inflation expectations, micromanaging them may be counterproductive, he added.
