Reserve Bank of India Governor Shaktikanta Das has an “out of the box” suggestion: central banks need to be more flexible on the size of their interest-rate moves.
Instead of a conventional 25 basis point cut and announcement of a dovish, hawkish or neutral stance to give guidance on future actions, policy makers could just change the rate to the dynamics of the situation, Das said in Washington.
The Reserve Bank has delivered two back-to-back rate cuts of 25 basis points each this year to boost growth in Asia’s third-largest economy. It softened its policy stance to neutral in February and maintained that last week.
“If easing of monetary policy is required but the central bank prefers 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 to a pre-committed direction,” he said.
The governor, who took over from Urjit Patel in December after the latter quit following differences with the government, has reversed two hikes made by his predecessor last year. He’s also relaxed restrictions on weak state-run banks to help spur borrowing, and allowed lenders to restructure loans to small and medium-sized businesses that are in default.
The central bank last week lowered the growth forecast for the fiscal year that began April 1 to 7.2 percent from 7.4 percent seen previously.
His latest idea comes as markets see one more rate cut, possibly as early as June, to boost growth in the $2.6 trillion economy amid weak consumption at home and risks from abroad.
“In a situation in which the central bank prefers to be accommodative but not overly so, it could announce a cut in the policy rate by 35 basis points if it has judged that the standard 25 basis points is too little, but its multiple — that is, 50 basis points — is too much,” Das said.