Monetary policy framework: Let's go from good to great

Today's regime and its inflation target are fine but how policy decisions are made could be improved upon

- MYTHILI BHUSNURMATH

Caution is the hallmark of central banks across the world. That perhaps explains why the US Federal Reserve, which has just completed its five-yearly review of its monetary policy framework, and the Reserve Bank of India (RBI), which is in the process of doing so, have opted largely in favour of the status quo.

The Fed, in its Revised Statement on Longer-Run Goals and Monetary Policy Strategy released on 22 August, declared its intent to continue with its 2% inflation target. Likewise, RBI, in its Discussion Paper Review of Monetary Policy Framework released a day earlier, argues strongly in favour of retaining the core principles of the existing framework.

In parallel with the Fed's desire to "give the public a clear sense of how the Fed thinks about monetary policy, given that such understanding is important both for transparency and accountability, and for making monetary policy more effective," RBI sees the review as "an opportunity to revisit some of the basic tenets of the framework to nudge the economy towards further improved macroeconomic outcomes in the best interest of all stakeholders."

This is a good beginning; a welcome change from the central bank's usual ivory-tower approach. Remember, the first review in 2021 was done away from the public eye. But it is not enough. RBI must try and reach out to a wider audience on the lines of 'Fed Listens' events in the US, where Fed officials engage with a wide cross-section of the public, including the hoi polloi, to hear how its monetary policy affects their daily lives.