A forecast of the future path of interest rates, or a dot plot, could create unnecessary expectations, Reserve Bank of India (RBI) Governor Shaktikanta Das said on July 22.
Speaking at Bank of Baroda's Annual Banking Conclave, the central banker said the Monetary Policy Committee (MPC) already provides some forward guidance, with members providing further clues on what they think in the minutes of MPC meetings.
"The situation today, and it's been earlier also, is extremely volatile and extremely uncertain. In such uncertain times, giving a dot plot may create unnecessary expectations on either side. It will create expectations which you may or may not be able to fulfill going forward through your actions," Das said.
Das' comments on the feasibility of a dot plot come after Jayanth Varma, one of the three external members of the MPC, said in the minutes of the June 6-8 meeting that the time was "ripe" to start moving towards providing projections of the future path of the policy rate.
The dot plot refers to the interest rate forecasts of the US Federal Reserve. These projections detail the Federal Open Market Committee (FOMC) members'–voting and non-voting– assessment of the appropriate mid-point of the federal funds rate target range at the end of the current and upcoming couple of calendar years as well as in the longer run.
Varma told Moneycontrol on June 23 that while the provision of a dot plot would take a lot of preparation and hard work from the RBI and the MPC, members could begin with "baby steps" and start with projections only for the next quarter and slowly expand the time horizon of the forecasts.
“It is possible to begin with broad ranges for the policy rate and then progressively refine the range. These are all matters of implementation detail. The important thing is to have a consensus on whether this is worth doing," Varma told Moneycontrol.
However, Das on July 22 shot down the proposal.
"In February, when we presented the monetary policy, nobody expected a war of this magnitude and the impact that it has created. Suppose we had given a dot plot kind of thing and had been very specific that this is how we are going to move, that is representing each member's thinking then the situation completely undergoes a change," he said.
Das said there had to be "some amount of consistency" in the RBI's communication. While the central bank's actions should change when facts change, "broadly there has to be some kind of consistency in our approach".
The MPC was already providing sufficient forward guidance through its statement and the minutes of the meetings, the RBI governor said."So we are already doing it. But a dot plot and binding yourself to specific points will not work, I feel, in these current times when the situation is so uncertain and volatile," he said.