Shaktikanta Das, the new Governor of Reserve Bank of India, pauses during the 50th Asian Development Bank (ADB) Annual Meeting in Yokohama, Japan. (Source: Bloomberg)

Is Shaktikanta Das Signalling A Shift From The ‘25 Basis Point’ Rate Moves?

Reserve Bank of India Governor Shaktikanta Das has called for the need to challenge conventional wisdom as the global economy moves towards another rough patch of slower growth amidst limited monetary and fiscal space.

While dismissing more radical ideas like ‘Modern Monetary Theory’, Das questioned whether small changes — like the unit of interest rate moves — can offer central banks more flexibility?

“Let me try and shock you with one such thought experiment,” Das said while speaking at the IMF-World Bank spring meetings in Washington. He went on to question why many central banks, including the RBI, prefer to make interest rate changes in units of 25 basis points each, along with a monetary policy stance to communicate future actions.

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.
Shaktikanta Das, Governor, Reserve Bank of India

For instance, if a central bank prefers to be cautious in its monetary policy accommodation, can it opt for a 10 basis point rate cut, Das asked. This, he argued, may help communicate the central bank’s thinking better than a 25 basis point cut, accompanied with a “stance” aimed at communication a cautious approach. This stance then binds the central bank to a pre-committed direction, he argued.

Das’ comments come in the midst of a monetary policy cycle where India’s monetary policy committee has been criticised for not signalling its future actions appropriately. The MPC first raised rates twice by 25 basis points each in 2018 while retaining a ‘neutral’ stance. Just as it moved to a ‘calibrated tightening’, lower-than-expected inflation prompted two consecutive rate cuts along with a ‘neutral’ stance.

Das said that calibrating the units of interest rate moves may help “avoid policy turnarounds 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.
Shaktikanta Das, Governor, Reserve Bank of India

Also read: The Mismatch Between What MPC Says And What RBI Does

Out-Of-The-Box But Not Radical

While advocating out-of-the-box thinking, Das stayed away from radical ideas like ‘Modern Monetary Theory’, which have gathered steam.

As global economy loses speed and fiscal space gets squeezed, focus may return to monetary policy, said Das while adding that the global financial crisis has exposed several limitations of conventional and unconventional monetary policy. “In despair, some have turned to the heterodox evolution of ideas that has come to be known as modern monetary theory,” Das said.

While the jury is still out on this idea, I have my own strong reservations on this due to its serious downside risks. In the end, monetary policy must touch the real economy, spur investments, and maintain monetary and financial stability.
Shaktikanta Das, Governor, Reserve Bank of India

Also read: A Beginner’s Guide to MMT

Challenges For Emerging Economies

At a time when developed market central banks continue to adopt unconventional monetary policies, Das pointed to volatile capital flows as one of the continuing challenges for emerging economies.

Das argued that emerging market central banks need to build forex reserves to deal with sudden stops and reversals in capital flows.

“Paradoxically, the accumulation of reserves has become stigmatised, including with labels such as currency manipulation,” Das said while referring to the U.S. Treasury Department’s report on currency manipulation.

India, a country which runs a current account deficit, surprisingly found itself on this list due to a build-up of forex reserves. Das questioned this approach while adding that the RBI “will continue to play by the extant rules of the game.”

He added that, over the long term, this approach from developed economies could prompt emerging economies to challenge the “hegemony” of reserve currencies.

As I see it, we may be unintentionally setting the stage for several EME currencies to break out and challenge the hegemony of the dominant reserve currencies.
Shaktikanta Das, Governor, Reserve Bank of India

Also read: Central Banks Need To Be Left Alone, Says Raghuram Rajan 

Outlook For Indian Economy

Das expects India to remain one of the fastest growing among large economies.

GDP growth in 2019-20 is seen at 7.2 percent. Inflation has remained below target and averaged 3.6 percent since the inflation targeting regime was put in place in October 2016. The current account deficit is expected to be around 2.5 percent of GDP in 2018-19; and the gross fiscal deficit has adhered to budgetary targets, Das said.

Looking ahead, our priority is to remain watchful and take coordinated action to revive growth and maintain macroeconomic, financial and price stability.
Shaktikanta Das, Governor, Reserve Bank of India

Also read: IMF Warns Policymakers to ‘Do No Harm’ as World Economy Wobbles