It's a dilemma whether to lower rates in a bold or measured way

RBI opted for a bold cut under conditions of economic uncertainty in defiance of the conservative school of monetary policy

- NIRANJAN RAJADHYAKSHA is executive director at Artha India Research Advisors.

The minutes of the June meeting of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) were released last week. They tell us a lot about how the fog of uncertainty hanging over the global economy has influenced the thinking of the six MPC members who collectively decide interest rate policy in India.

Against the backdrop of trade frictions, sudden movements in the prices of financial assets and growing geopolitical tensions, the minutes mention the word "uncertainty" as many as 16 times. The word "certainty" has six mentions, and that too mostly in the context of uncertainty; for example: to "provide some certainty in the times of uncertainty."

How monetary policymakers should respond to uncertainty is a tricky question, as much art as science. The main issue is how monetary policy should be crafted by a central bank when the impact of its policies on the economy is even less predictable than usual. In other words, when it is unclear how firms, consumers and financial markets will respond to changes in interest rates, as is often the case when an economy is being battered by exogenous shocks such as military or trade wars. This leads to what is described as "parameter uncertainty," which lowers the efficacy of the forecasting models used by central banks to peer into the future.