The unconventional monetary policy
measures undertaken by global central banks
during the crisis period worked mainly through the confidence and signaling channels, he emphasized. However, the US Fed’s ‘taper tantrum’ induced financial volatility could have been avoided “through clear advance communication on calibrated withdrawal of monetary policy
Governor Das’ stress on communication comes at a time when the central bank prepares to revamp its liquidity management framework. The central bank is expected to use effective communication to bring the market participants and the central bank on the same page in terms of interpretation of liquidity. This should cut down the information asymmetry significantly and make rate stable and help policy transmission easier.
The central bank’s changes in stance, for example, from ‘neutral’ to ‘accommodative’, is an example of such communication. While it does not directly bring a rate cut, but it acts as a strong communication to the market that “rate hikes are off the table,” as Das elaborated in the June post-policy conference.
The same can be interpreted by the market as the central bank being open to more rate cuts, and that acts as a message to the bond market and brings down the interest rates.
“The Reserve Bank’s approach to communicate the policy stance is to explain it with rationale, information and analysis to enable market participants and stakeholders to have better clarity about the Reserve Bank’s assessment of the evolving situation," governor Das said.
Balancing price with growth
The primary objective of the central bank’s monetary policy
is to 'maintain price stability while keeping in mind the objective of growth,' according to the RBI
Act, amended in 2016.
“Therefore it has been our endeavour in the Reserve Bank to ensure price stability under the flexible inflation targeting regime and simultaneously focus on growth when inflation is under control,” the governor said.
However, managing inflation with growth in mind is a “delicate balance”, when prices are allowed to rise only within a limit. The RBI
is mandated to keep consumer price based inflation contained at the central point of 4 per cent, plus minus 2 per cent.
“The relative emphasis on inflation and growth depends on prevailing macroeconomic scenario, inflation and growth outlook and signals emerging from incoming data,” the central bank governor said.
However, post credit crisis, ‘financial stability’, along with ‘price stability’ is gaining currency as the central bank mandate. The Reserve Bank, according to Das, has always kept that in mind even without the RBI
Act explicitly mandating so.
“… though jury is still out as to whether it should be added as an explicit objective of monetary policy. The fact remains that though the focus of monetary policy is mainly on inflation and growth, the underlying theme has always been financial stability,” Das said.
Even as the global economy is still to recover to the pre-crisis growth path, with the International Monetary Fund
warning that 70 per cent of global economies slated for a slowdown, “India has continued to exhibit robust growth driven by consumption
and investment demand in the last three years.”
There has been a loss of speed in the second half of 2018-19, as investment and exports slowed down. Agriculture and manufacturing also moderated sharply. However, due to the end of political uncertainty associated with an election season and continuation of economic reforms, there could be a “reversal of the current weaknesses in some of the indicators in our economy,” Das said. And this needed “high policy attention” to reform both banking and non-banking sectors.