The recent statement by Reserve Bank of India (RBI) Governor Shaktikanta Das that suggested moving away from the conventional magnitude of rate revisions that are in multiples of 25 bps (basis points), was indicative of second generation policy signals on the lines of the U.S. Federal Reserve, State Bank of India said in a report.
In a speech last week, Mr. Das had said that calibrating the size of the policy rate and the size of the change itself can convey the stance of policy.
Mr. Das delivered the speech on the sidelines of the International Monetary Fund (IMF) and World Bank’s spring meetings at Washington DC.
“We believe that such thinking signifies the RBI’s intent to use communication as a policy in itself rather than being the policy statement being the vehicle for communication. These are akin to second generation policy signals that Fed provides to the market now,” Soumya Kanti Ghosh, group chief economic adviser, SBI, wrote in a note.
Reducing disconnect
The report said “second generation signals” will reduce the disconnect with market expectations in the subsequent press conference with researchers and analysts.
The report says the intent of the RBI Governor looked quite positive but seemed to be futuristic.
It also raises the question that when 25 bps rate cut, or sometimes even a 50 bps rate cut is not able to initiate a transmission of rate cut, how an indicative rate cut of 10 or 15 bps will work.
