New Delhi: Reserve Bank of India (RBI) governor Shaktikanta Das has proposed to his counterparts in other economies that interest rate changes need not be in tranches of 25 basis points or multiples of it and instead, could be tailored to suit the dynamics of the economic situation. In his address at the ‘governor talks’ event on the sidelines of IMF-World Bank spring meetings in Washington DC, Das proposed that interest rate changes could be in terms of 10 basis points or 35 basis points so that central banks’ response is appropriate and will not complicate its position in a volatile situation.
“…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," said Das in the speech, the transcript of which has been released by the RBI on Saturday. One basis point is one hundredth of a percentage point.
Das said that when monetary policy easing is needed by the central bank prefers to be cautious about how far it should go, a 10 basis points cut in the policy rate would signal the intent of authorities. This, he said, was better 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 monetary policy stance. Similarly in a situation where 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, said Das.
RBI had cut rates by 25 basis points each in February and April to support economic growth but Das highlighted in his speech the risk volatile oil prices posed to net energy importers like India on current account deficit and inflation. He also said that India’s economic growth is expected to be 7.2% in 2019-20, the fastest among large economies of the world.
The governor also said a central banks have to interact closely with financial markets for transmission of monetary policy issues. He also said that in view of the exponential growth in e-commerce and digitization, the authorities are working on guidelines to introduce a 'regulatory sandbox/innovation hub' for orderly growth of fintech firms and streamlining their influence in the financial system. Sandbox is a hub, where regulators enable limited roll-out of new products on small group of users before scaling up, which can help fintech companies launch new products at lower cost and in less time.