RBI likely to consider table of repo rate changes mapped to policy stance

The Reserve Bank of India (RBI) could consider evolving a table of repo rate changes mapped to its monetary policy stance, according to the State Bank of India’s economic research department.

This suggestion comes in the context of the RBI Governor recently stirring a debate that if the unit of 25 basis points (for effecting a rate change) 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.

In this regard, the ERD team of the State Bank of India (SBI) has come up with a hypothetical rating scale mapped to RBI’s policy stance, with a 15 basis points (bps) cut reflecting ‘least accommodative’ stance and a 55 bps cut reflecting ‘most accommodative’ stance.

The bank, in its Ecowrap report, said a 25 bps rate cut could would reflect ‘moderately accommodative’ stance; 35 bps (accommodative); 45 bps (more accommodative). One bp equals one-hundredth of a percentage point.

“For example, can we not think of a rate hike / cut of even more than 50 bps? Alternatively, can we have a table of rate changes mapped to policy stance just as rating agencies do? These are all questions that need to be answered,” said Soumya Kanti Ghosh Group Chief Economic Adviser, SBI.

Read:RBI likely to slash interest rate for third time in June, says BofA-ML

Second-generation signals

Pointing out that the RBI typically provides first-generation signals in its policy statement, the report said the RBI may think of providing “second-generation signals” in its policy statement. This will reduce the disconnect with market expectations in the subsequent press conference with researchers and analysts.

“The RBI could use the rate change in non-multiples of 25 bps as a first step towards providing second-generation signals to market of future policy stance. The next step could be replacing the ‘for an extended period’ with precise date.

“However, the problem of rate cuts of smaller magnitude could be of transmission,” said Ghosh.

On policy challenges, RBI Governor Shaktikanta Das recently said, “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 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.”

Also read:Limits to real interest rate as a concept

Likewise, Das elaborated that 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, 50 basis points is too much.

“This approach can also be useful when the central bank is on a tightening mode and potentially help avoid policy turnaround from forward guidance via stance too far into the future, which in a highly volatile global scenario, may not even be a year,” Das said.

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