Monetary policy alone can’t sway growth: RBI

November 25,2022

RBI deputy governor Michael Patra has said that monetary policy on its own cannot influence long-run growth of the economy. Highlighting the challenges before monetary policymakers, Patra said that there is no visibility on the goal variables of inflation and growth as the former numbers are one month old, while those on GDP are at least three months old.

Speaking at the SBI conclave on Thursday, Patra said that communication has become an important instrument in the central banking toolkit. He said that communication was now being used by global central banks including those in the US and the UK for doing a ‘policy pivot’.

“Most recently, an aspect of communication that has caught the imagination of the public is the ‘policy pivot’ — deliver a 75-basis-point (100bps = 1 percentage point) rate hike and then, through subtle shifts in messaging, convince markets that dovishness will characterise the next monetary policy meeting,” he said. He added this was seen in the post-council meeting conference in the European Central Bank as well as US Fedchair Jerome Powell’s postNovember 2 meeting statement.

“Monetary policy has to be forward-looking, and that is because when the policy rate is changed, it takes quite a while before it reaches lending rates and aggregate demand in the economy. Hence, we can only target future inflation, not yesterday’s,” said Patra. “Furthermore, the goal variables are moving over time and so monetary policymaker has to take into account not their known positions but their uncertain future trajectory,” he added.