Financial markets around the world have become extremely volatile as they grapple with heightened uncertainty about the pace of future monetary policy normalization, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday. “Recent geopolitical developments have further exacerbated the challenges and dilemmas facing central banks,” Mr Das said, without giving further details on the developments to which he was referring. “Current global conditions now pose complex challenges for central bank communications after about two years of living through the pandemic,” he noted, delivering a speech on monetary policy and central bank communications at the National Defense College in New Delhi. “Some economies, including large ones, are facing multi-decade high inflation due to supply disruptions, tighter labor markets, the fragility of just-in-time inventory management and geopolitical disruptions,” he added.
“Central banks are in a bind – if they act aggressively to contain inflation, which may ease when normality returns, they risk slipping into recession; On the other hand, if they do too little and too late, they can be blamed for being ‘behind the curve’ and have a lot of catching up to do later, which is detrimental to growth,” he noted.
Communication is a highly effective component of the modern central bank’s toolbox, and he said it must be balanced and well-wired to avoid unintended consequences. Given the current uncertainties, central banks need to find the optimal reasons with the communication challenges that come with them, he added. Regarding RBI’s communication approach, Mr Das said the central bank follows a consultative process by regularly interacting with various stakeholders on policy formulation. “This has particularly helped us in designing appropriate policy responses, especially during the pandemic. We believe in two-way communication for informed policy decisions,” he added.