The scope of a monetary policy statement has changed over the years. From the conventional slack and busy season policies, we have moved to multiple policy reviews, 8 times a year under former RBI Governor D Subbarao and now 6 times, under Governor Raghuram Rajan. In the earlier versions, the policy was comprehensive and covered all aspects of the financial sector including debt markets, credit delivery, urban banks, and prudential regulation and so on. Even when we had more frequent reviews, the quarterly reviews were all-encompassing.
RBI, however, retained the prerogative to intervene between two scheduled policy reviews if it was warranted, quite like in 2013 when the LAF facility was modified and the MSF rate was hiked. While the idea of having multiple reviews more frequently was to lower the noise factor, it may have made policy that much less effective as the market appeared to be ahead of the policy change. This is a conundrum which still needs to be resolved. Surprises can cause an upheaval in the bond market and affect the valuation of over R65 lakh crore of government securities. On the other hand, anticipated changes tend to silently pass by the impervious market once it has already been buffered.
Further, by having separate committees look at various aspects of the markets, we have actually spliced the policy and differentiated between monetary policy action and regulatory and systemic issues. Each of these subjects have been dealt with separately thus making monetary policy a pure monetary affair. Therefore, monetary policy will be about interest rates and nothing else. This becomes similar to what central banks do globally where only interest rates are spoken of in the context of growth, employment, and inflation.
To put the policy stance in perspective, a backdrop of the global forces and the state of the domestic economy becomes relevant so that one can understand the rationale behind the central banks moves. This, sort of, prefaces the policy while explaining the proposed action. Invariably, there is a call taken on how the economy would be behaving and what the price situation is likely to be going ahead.
If one were to put a theory to the current wave of thinking on Mint Street, then there appears to be a movement towards a pattern of surprise. The number of policy reviews has been reduced to 6 from 8. Also, since September, there