Explicit RBI guidance is not necessarily useful

livemint.com:

Clarity of expression by central banks is fairly new. It was the Great Recession of 2008-09 that made them give up ‘constructive ambiguity,’ which routinely got heads scratched over what had been said (or hinted at), in favour of corporate-style ‘forward guidance’ on economic conditions and their policy path. A struggle against stubborn inflation, however, has seen the return of relative reticence, especially after financial markets got rattled by hawkish talk by top bank chiefs.

Intuitively, it makes sense for monetary authorities to exercise discretion if policy rates must rise in a fog of uncertainty, given the hazards of forecasts going wrong, caveats getting ignored, markets being warped by misconceptions and the resultant losses of credibility and policy traction. Guidance must not misguide. But still, if central bank clarity begins to go fuzzy just as a relaxed policy of ultra-easy money goes into spasms of reversal, one may ask why what’s sauce for the goose isn’t sauce for the gander.

Let’s look at guidance as policymakers would: as a policy tool to anchor expectations and nudge market behaviour. As a recent Reserve Bank of India (RBI) paper by Michael Patra, Indranil Bhattacharyya and Joice John notes, however, there is a major asymmetry in the efficacy of this instrument. “Forward guidance has a statistically significant impact on [longer tenor] interest rate expectations," the paper says, “but it progressively loses potency as the policy rate rises from highly accommodative levels." This was yielded by a study of how RBI’s stance affects overnight indexed swap (OIS) rates in India.