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Monetary economics in developing markets needs rethink: RBI Governor

15 Apr 2019 Evaluate

Reserve Bank of India (RBI) Governor Shaktikanta Das has observed that the global financial crisis are exposing several limitations of conventional and unconventional monetary policy tools. Therefore, he suggested that monetary economics in emerging markets needs a rethink. He noted that this includes challenging the conventional wisdom of modern central banks to hike or reduce their interest rates by 25 basis points or multiples thereof.

Das has stated that unconventional monetary policies of advanced economies have resulted in risks and spillovers for the emerging markets. According to him, monetary policy must touch the real economy, spur investments and maintain monetary and financial stability. Therefore, he said that the time has come to think out of the box, including challenging the conventional wisdom. Adding further, he said that modern central banks generally announce a stance of tightening, neutrality or accommodative to guide the markets and the public on the future course of policy along with any changes in the rate.

The RBI Governor said “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.” He also explained that 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, that is 50 basis points, is too much. He added that 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.

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