Financial markets the world over have turned extremely volatile as they have been left grappling with heightened uncertainty over the pace of future monetary policy normalisation, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday. “Recent geopolitical developments have further aggravated the challenges and dilemmas for the central banks,” Mr Das said, without providing any further details on the developments he was referring to. “The current global conditions, after about two years of living through the pandemic, are now posing complex challenges for central bank communication,” he noted, delivering an address on Monetary Policy and Central Bank Communication at the National Defence College in New Delhi. “A number of economies, including the major ones, are facing multi-decadal high inflation due to supply disruptions, tighter labour markets, fragility of the just in time inventory management and geopolitical disturbances,” he added.
“Central banks are in a bind – if they act aggressively to contain inflation which may perhaps subside as normalcy returns, they run the risk of setting in recession; on the other hand, if they act too little and too late, they may be blamed for “falling behind the curve” and may have to do a lot of catching up later which will be detrimental to growth,” he observed.
Stating that communication was an extremely potent component of the toolkit of modern central banks, he said it needed to be balanced and well-telegraphed to avoid unintended consequences. Given the current uncertainties, central banks had to find the optimal grounds with attendant communication challenges, he added. As far as the RBI’s approach to communication was concerned, Mr. Das said the central bank followed a consultative process by periodically interacting with various stakeholders on policy formulation. “This has particularly served us well in designing appropriate policy responses, especially during the pandemic. We believe in two-way communication for informed policy decisions,” he added.