Rate confusion

The shift to rate-setting by a committee thus complicates the job for all those who are in the business of guessing the next monetary policy move


Photo: Bloomberg
Photo: Bloomberg

Indian interest rates will, from this week, be set by six members of the monetary policy committee rather than the Reserve Bank of India governor alone. That will make predicting the future course of interest rates a more difficult game. It is thus no surprise that economists are now divided on the question of interest rates: one half expects the central bank to cut rates on Tuesday while the other half says there will be no change. Such a situation is rare, considering that market expectations are usually clustered around a consensus.

The shift to rate-setting by a committee thus complicates the job for all those who are in the business of guessing the next monetary policy move, be they economists, bond traders or journalists. They have to anticipate the views of six people rather than one. There is a communication challenge for policymakers as well—anchoring market expectations just got more difficult. A wide range of interest rate forecasts would, in effect, mean a signalling failure by the central bank.

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