The timing and communication are crucial for effective monetary policy, Shaktikanta Das, governor of the Reserve Bank of India (RBI), said Friday. Adding monetary policy is an art of managing market expectations, even as pressures have increased to tighten policies to contain high inflation.
“Monetary policy is not just a science where we adapt a tool to achieve a goal. It is also an art to create new tools and answer policy calls in response to anticipated and evolving challenges and address them with foresight and clarity. communicate, especially in times of crisis,” the RBI governor said while addressing an event at the National Defense College, the Department of Defense, in the national capital.
“Decision, timing and communication are key to effective monetary policy,” he added.
Supply-driven inflation was the bane of India before the pandemic for many years, and as most parts of the country open up and COVID-19 restrictions ease, demand is expected to increase.
Price pressures have increased globally, driven by the pandemic-induced supply disruptions, which do not appear to be disappearing any time soon. What has not helped has been the escalation of tensions on the Russia-Ukraine border, which has seen oil prices hit $100 a barrel for the first time since 2014, with no end in sight for an immediate de-escalation or alleviating energy costs.
The latest reading showed Indian retail inflation in January was above the upper bound of the RBI’s 2-6% target. The central bank has been widely criticized for not phasing out its monetary stimulus.
However, Mr Das reiterated that the RBI’s communication should be supported by corresponding actions to build credibility and wider confidence in its policies.
“We also recognize that communication must be supported by proportionate actions to build credibility and instill greater confidence in our policies,” the governor said.
“In this process, communication has become more important, although it works both ways – while too much communication can confuse the market, too little can leave the market guessing about the central bank’s policy intent. Therefore, central banks have to walk a very thin line, he added.
Mr Das said that since monetary policy is an art of managing expectations, central banks must shape and anchor market expectations through statements and actions and constant refinement of their communication strategies.