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| RBI Governor says communication and timing crucial to effective monetary policy | | |  The timing and communication are crucial to effective monetary policy, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday, adding monetary policy is an art of managing market expectations, even as pressure has increased for policy tightening to control high inflation.
"Monetary policy is not merely a science where we tweak some instrument to achieve an objective. It is also an art of creating new instruments and taking policy calls in response to anticipated and evolving challenges and communicating them with prescience and clarity, especially during crisis times," the RBI Governor said while addressing an event at the National Defence College, Ministry of Defence, in the national capital.
"Decisiveness, timing and communication are key to effective monetary policy," he added.
Supply-driven inflation has been India's bane for years before the pandemic, and with most parts of the country opening up and easing COVID-19 restrictions, the demand is expected to rise.
Price pressures have risen globally, driven by the pandemic-led supply disruptions, which do not seem to disappear anytime soon. What has not helped is the escalation in Russia-Ukraine border tensions, which has pushed oil prices to touch $100 per barrel for the first time since 2014, with no end in sight for an immediate de-escalation or easing in energy costs.
The latest reading showed India's retail inflation in January was above the upper end of the RBI's 2-6% target. The central bank has been criticised widely for not unwinding its monetary stimulus.
However, Das reiterated the RBI's communication needs to be backed by corresponding actions to build credibility and broader confidence in its policies.
"We also recognise that communication needs to be backed by commensurate actions to build credibility and instil wider confidence in our policies," said the governor.
"In this process, communication has gained importance although it works both ways - while too much of communication can confuse the market, too little may keep it guessing about the central bank's policy intent. Therefore, central banks have to tread a very fine line," he added.
Mr Das said that as monetary policy is an art of managing expectations, central banks have to shape and anchor market expectations through pronouncements and actions and constant refinement of their communication strategies. |
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