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RBI Governor  Shaktikanta Das gives

RBI Governor Shaktikanta Das gives "out of the box" idea on policy rate changes

India Blooms News Service | @indiablooms | 13 Apr 2019, 04:25 pm

Washington, Apr 13 (UNI) Reserve Bank of India Governor Shaktikanta Das has an "out of the box" idea that interest rate changes could be in terms of 10 basis points or 35 basis points so that central bank's response will not complicate its stance in a volatile situation.

The RBI had cut rates by 25 basis points each in February and April to support economic growth.

Speaking at the IMF-World Bank Spring meeting here on Friday, Das said that time has come to think "out of the box", including by challenging the conventional wisdom.

"Let me try and somewhat shock you with one such thought experiment ...One thought that comes to my mind is that if the unit of 25 basis points is not sacrosanct and just a convention, monetary policy can be well served by calibrating the size of the policy rate to the dynamics of the situation and the size of the change itself can convey the stance of policy.

"For instance, if easing of monetary policy is required but the central bank prefers to be cautious in its accommodation, a 10 basis points reduction in the policy rate would perhaps communicate the intent of authorities more clearly than two separate moves – one on the policy rate, wasting 15 basis points of valuable rate action to rounding off, and the other on the stance, which in a sense, binds future policy action to a pre-committed direction."

Likewise, in a situation in which the central bank prefers to be accommodative but not overly so, it could announce a cut in the policy rate by 35 basis points if it has judged that the standard 25 basis points is too little, but its multiple, i.e., 50 basis points is too much.

This approach can also be useful when the central bank is on a tightening mode and potentially help avoid policy turnaround from forward guidance via stance too far into the future, which in a highly volatile global scenario, may not even be a year.

"I am articulating this idea not necessarily in search of a theory but in search of traction with domain experts and more particularly, with practitioner central bankers who face these dilemmas in their day-to-day lives," he said. 

RBI Governor Shaktikanta Das gives "out of the box" idea on policy rate changes

India Blooms News Service
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