MUMBAI: Interest rate guidance is more effective when policy rates are low as compared to when they are on their way down, according to RBI deputy governor
Michael Patra
.
“Under heightened uncertainty, discretion in forward guidance has increasingly gained legitimacy among major central banks. Empirical evidence in the Indian context suggests that forward guidance in a policy tightening cycle loses steam as the policy rate increases beyond a threshold,” Patra said. He was speaking at an RBI conference of central banks in the global south.
According to Patra, the optimal level of communication remains the gold standard for all central bankers – too much can create a “signal extraction problem” while too little can keep markets guessing.
In its Aug policy, RBI changed its stance from ‘withdrawal of accommodation’ to ‘neutral’ leading many to believe that a rate cut was around the corner. However, RBI governor
Shaktikanta Das
subsequently said that assuming an imminent rate cut was a wrong inference.
Patra, in his speech, said that central banks have moved away from secrecy towards greater transparency and public engagement. This evolution has been driven by the need for accountability and the recognition that communication itself can be a policy tool.
While transparency is important, there are limits, especially during times of high uncertainty.
