RBI policy rates: why only in multiples of 25bps?

MUMBAI: Will RBI try out announcement of policy rates without the [conventional] multiples of 25 basis points?

The RBI Governor Shaktikanta Das, believes that by invoking numbers that are not necessarily multiples of 25 basis points, which is presently followed by RBI – say 10 bps or 35 bps – the central bank can convey much more precise message to the market, and this way, the policy rates can even convey the message about the Stance the central bank takes, to a good extent.

Talking on the sidelines of the Fund-Bank Spring Meetings, 2019, Washington DC on Friday (April 12), Das shared his out-of-the-box thought 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.

“For instance, if easing of monetary policy is required but the central bank prefers to be cautious in its accommodation, a 10 basis points reduction in the policy rate would perhaps communicate the intent of authorities more clearly than two separate moves – one on the policy rate, wasting 15 basis points of valuable rate action for the sake of rounding off, and the other on the Stance, which in a sense, binds future policy action to a pre-committed direction,” the Governor explained further.

Likewise, 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, i.e., 50 basis points is too much.

Das said 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.

“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,” he concluded.

 

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