Washington D.C., RBI Governor Shaktikanta Das on Friday proposed to his peers on the sidelines of an International Monetory Fund (IMF) event here that the monetary policy can be well served by calibrating the size of the policy rate, instead of the 25 basis points (bps) unit.
Das said that “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”.
He further explained that if easing of monetary policy is required but the central bank prefers to be cautious in its accommodation, a 10 bps reduction in the policy rate would perhaps communicate the intent of the 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.”
“Likewise, 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, i.e., 50 basis points is too much,” Das said.
