The Reserve Bank of India’s (RBI) deputy governor, M. D. Patra, spoke at the RBI’s 90th anniversary celebration in Mumbai on the topic of “Communicating Monetary Policy,” noting that central banks are still honing their methods for communicating with the public and that strengthening this “soft skill” is crucial for boosting their communication efforts.
Patra stated that although the effectiveness of forward guidance at extremely low policy rates has been clearly demonstrated, its usefulness at higher rates is debatable. The monetary policy cycle is asymmetric, as evidenced by the fact that while the way up is technically unbound by any upper bound, the way down has a lower bound. Major central banks are increasingly recognizing the legitimacy of discretion in forward guidance in the face of increased uncertainty. In the Indian context, empirical evidence indicates that as the policy rate rises over a certain point, forward guidance in a policy tightening cycle loses momentum.
Using the RBI as an example, Patra stated that since the implementation of flexible inflation targeting, or FIT, in 2016, the RBI’s monetary policy communication practices have largely followed international best practices. This includes publishing analyses of changing economic conditions, including growth and inflation outlooks and the risks associated with them, as well as providing justifications for policy decisions through press conferences and policy statements. Two weeks after the policy announcement, the MPC minutes are released.
What is flexible inflation targeting?
According to the UPCR, flexible inflation targeting seeks to stabilize inflation expectations, boost medium-term growth prospects, and improve macroeconomic stability overall. In order to accommodate expansion, this regime also permits short-term deviations from the target inflation rate.
In contrast, strict inflation targeting ignores the effect on the actual economy in favor of stabilizing inflation alone (Gupta and Sengupta 2014). The UPCR’s recommendation to switch to this method has also sparked a lot of discussion about the costs and advantages.
