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Central banks in a bind, geopolitical situations aggravate dilemmas: Das

The RBI kept the repo rate unchanged for the tenth time in a row at 4 per cent and retained the accommodative policy stance in the February policy review.

monetary policy, retail inflation, Inflation, Reserve Bank of India, Shaktikanta Das, RBI, Business news, Indian express business news, Indian express, Indian express news, Current AffairsShaktikanta Das Governor, Reserve Bank of India (File)

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said central banks are in a bind as the recent geopolitical developments — the Russian invasion of Ukraine — have further aggravated the challenges and dilemmas for them.

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“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,” Das said. 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, Das said while delivering his speech at the National Defence College.

He said the current global conditions, after about two years of living through the pandemic, are now posing complex challenges for central bank communication.

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The RBI kept the repo rate unchanged for the tenth time in a row at 4 per cent and retained the accommodative policy stance in the February policy review. With inflation now crossing the 6 per cent level and threatening to rise further, several analysts are now arguing that the RBI faces the risk of “falling behind the curve” if the accommodative policy is not changed.

Meanwhile, financial markets have turned extremely volatile as they have been left grappling with heightened uncertainty over the pace of future monetary policy normalisation. Amidst these uncertainties, central banks have to find the optimal grounds with attendant communication challenges, he said. “A number of economies, including the major ones, are facing multi-decadal high inflation due to supply disruptions, tighter labour markets, fragility of the just in time inventory management and geo-political disturbances,” he said.

Das said monetary policy is an art of managing expectations and central banks have to make continual efforts to shape and anchor market expectations.

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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.

According to him, there is no last word yet on what constitutes the best practice of monetary policy. The conduct of monetary policy has undergone notable changes both in India and across the world as economies and markets evolved and policymakers gained greater insights into how economic agents interact in a complex economic system, he said.

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Globally, the evolution of monetary policy has swung from being more directive and discretionary to a strict rule-based regime, before settling to the current consensus for a pragmatic mix of rules and discretion. “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,” he said.

“Recalibrating the pandemic time policy path, as and when the situation warrants, would present its own share of communication challenges,” he said. For RBI’s crisis measures announced with pre-specified terminal dates, market expectations remained anchored and communication challenges were minimal when these measures got automatically withdrawn.

On the other hand, measures or unwinding of open-ended policies, as and when they happen, would require careful, nuanced and measured communication as in such instances, the expectations of certain segments of the market may not be in sync with that of the central bank’s assessment, Das said. He said the RBI has been different from other central banks in our pandemic response. “We have undertaken unconventional measures even before exhausting the conventional policy space — i.e., even before reaching the zero lower bound of interest rates.”

First published on: 05-03-2022 at 03:20 IST
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