D Subbarao, Governor, Reserve Bank of India (RBI), said giving forward guidance on monetary policy poses challenges. “We have started the practice of giving forward guidance on monetary policy. Because of its potential impact, we pay much more attention to the language and nuancing of the ‘forward guidance’ paragraphs than other parts of the statement. Our experience in this regard has been quite positive. Nevertheless, we face some challenges,” Subbarao said.
According to him, forward guidance is always conditional. “The dilemma, then, is how precisely the conditionality is to be communicated, and how to ensure that the market does not ignore the conditionality and interpret the guidance as an irrevocable commitment. Conversely, how does the central bank ensure that it does not become hostage to its guidance? Also, the more uncertain the situation, the greater the need for guidance. But also, the more uncertain the situation, the more difficult it is to give definitive guidance.” Read More