- June 27, 2022
- Posted by: admin
- Category: Daily News
- India’s monetary policy can avoid falling behind the curve by following a forward guidance similar to the US Federal Reserve’s so-called dot plot, according to the South Asian nation’s most hawkish interest-rate setter.
- The central bank’s earlier pledge to keep policy ultra loose for as long as necessary restrained it from raising its key lending rate in Apr 22 despite inflation concerns taking center stage, Jayanth Rama Varma, an external member of Monetary Policy Committee, said in an email interview.
- “The forward guidance in February prevented the MPC from acting in Apr 22,” he said, noting that the rate hike eventually happened a month later in an off-cycle meeting.
- “A dot plot would not have stayed the MPC’s hands to the same extent.” The dot plot is a chart, published quarterly since Jan 12, of interest-rate forecasts from US central bankers.
- Members of the rate-setting Federal Open Market Committee each assign a dot for what they view as the midpoint of the rate’s appropriate range, and it currently suggests an aggressive pace of hikes to tame price increases.
- India’s guidance, on the other hand, is loosely a pledge to act to either contain inflation or support growth based on the votes of the rate panel’s six members.
- Forward guidance helps markets price in rate changes, which then feed into financial conditions.
- Varma pitched for a Fed-like “quantitative” forward guidance of monetary policy as “the bond market anticipates the future rate path and moves long yields accordingly.”
- He first made a case for signaling the likely pace of the RBI’s tightening measures in the MPC minutes released last week. The minutes also showed that the panel’s six members differed in their views on the pace of tightening due to varying degree of concern on future inflation outcomes.
- “The endeavor now should be to bring inflation close to the 4% target before the next crisis hits,” Varma said.
- Rising prices pressure, made worse by war-induced supply-chain disruptions, have pushed India’s inflation to multi-year highs. Central bankers expect prices to return to the mid-point target in two years, but not without taking a toll on the economy.
External Link : https://www.bloomberg.com/news/articles/2022-06-27/fed-style-dot-plot-can-guide-india-rates-well-says-policy-hawk