Monetary policy is an art of managing expectations RBI Governor

Reserve Bank Governor Shaktikanta Das said on Friday that “monetary policy is an art of managing expectations,” stressing the need for an effective communication strategy amid concerns about rising inflation fueled by geopolitical developments.

The conduct of monetary policy has undergone notable changes in India and around the world as economies and markets have evolved and policymakers have gained a better understanding of how economic agents interact in a complex economic system, he said during a lecture at the National Defense College here.

“As monetary policy is an art of managing expectations, central banks must make continuous efforts to shape and anchor market expectations, not only through utterances and actions, but also through constant refinement of their communication strategies. to ensure desired societal outcomes,” he added. noted.

Communication works both ways – while too much communication can confuse the market, too little can let it guess the central bank’s policy intent, he added.

The central bank also recognizes that communication must be supported by proportionate actions to build credibility and inspire greater confidence in politicians.

The Reserve Bank of India (RBI) has actively used communication through a variety of tools – MPC resolutions and minutes, comprehensive post-policy statements as well as a statement on development and regulatory measures, press conferences, speeches and other publications – especially the semi-annual Monetary Policy Report (MPR) – to anchor expectations, Das said.

The Governor informed that price stability under the law has been numerically defined by a target of 4% for the overall Consumer Price Index (CPI) with a margin of tolerance of +/- 2% around him. The flexibility of the FIT (Flexible Inflation Targeting) regime comes from provisions to accommodate or see through transitory supply-side shocks to inflation.

Failure to meet the monetary policy target is defined in terms of average headline CPI inflation remaining below or above the 2-6% range for three consecutive quarters, rather than overshoot/overshoot. fall in inflation below the target. This helps monetary policy avoid excessive volatility in rate-setting behavior that could negatively impact growth,” he said.

“The clearly defined inflation target and range, the establishment of the MPC, the explicit accountability mechanisms to define failure to meet the target, the detailed resolution and prompt publication of individual assessments in the Minutes have enhanced the transparency and credibility of monetary policy formulation in India,” Das said.

Retail price inflation exceeded RBI’s upper tolerance level at 6.01% in January from 5.66% in December 2021.

The rise was mainly due to high food inflation, which hit a 14-month high of 5.43% with an unfavorable base.

Referring to current global conditions, Das said this posed complex challenges for central bank communication after roughly two years of living through the pandemic.

A number of economies, including major ones, are facing high inflation over decades due to supply disruptions, tighter labor markets, fragile just-in-time inventory management and disruptions geopolitics, he said.

“Central banks are at an impasse – if they act aggressively to contain inflation which could perhaps subside with the return to normal, they run the risk of settling into a recession; on the other hand , if they act too little too late, they can be accused of being behind the curve and may have to do a lot of catching up later, which will be detrimental to growth,” he said. .

Meanwhile, he said, financial markets around the world have become extremely volatile as they grapple with heightened uncertainty about the pace of future monetary policy normalization.

“Recent geopolitical developments have further aggravated the challenges and dilemmas for central banks. Amidst these uncertainties, central banks need to find the optimal grounds with the attendant communication challenges,” he added.

Speaking of the measures taken to deal with the pandemic, Das said, RBI’s response was quick and decisive.

Over 100 actions have been taken since March 2020. In addition, twice – March and May 2020 – MPC meetings have been held ahead of schedule; while two other stand-alone statements were made by the Governor outside of the Monetary Policy Committee (MPC) cycle – one in April 2020 at the start of the COVID-19 crisis and the other in May 2021 at the peak of the second wave, he said.

“These off-cycle MPC meetings and stand-alone statements demonstrated the RBI’s willingness to take preventive action. We were perhaps the only central bank in the world to have set up a special quarantine facility with around 200 officers. , employees and service providers, engaged in critical activities to ensure business continuity in banking and financial market operations and payment systems,” he said.


Christopher S. Washington