“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,” Das said.
He gave the example of a situation where the central bank wants 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 to rounding off, and the other on the stance, which in a sense, binds future policy action.”
Das’s observation comes at a time when RBI shelved a plan to link bank lending rates to an external benchmark which included its own policy rate. RBI shelved its proposal after banks objected that changes in policy rates did not reflect the change in their cost of funds.
The governor’s statement comes at a time when it is trying hard to get banks to pass on cuts in lending rates.
Das suggested this change for central banks while calling for reforms citing limitations of conventional and unconventional policies after the global financial crisis. He expressed concern over ideas which advocates use of fiscal policy to increase employment and creation of money to fund government purchases. “In the end, monetary policy must touch the real economy, spur investments, and maintain monetary and financial stability,” he said.
Das also defended action of emerging markets to prevent appreciation of their currency by buying dollars citing the inadequacy of funds with IMF to support countries during volatility .
“When global spillovers flare up, emerging markets have no recourse but to build their own forex reserve buffers. Paradoxically, the accumulation of reserves has become stigmatised, including with labels such as “currency manipulation” said Das.
According to Das emerging markets were not out of the woods yet and were facing three major risks: global slowdown on the back of trade tensions and Brexit, volatility in global capital flows,and the high volatility in global oil prices. “The fact remains that we need more structural reforms precisely when the economy is slowing down to ensure durable momentum to growth,” said Das.
It was in the context of structural reforms Das has proposed changing the units of policy rates from the present ‘baby steps’ of 25 basis points followed by most countries.