Explicit RBI guidance is not necessarily useful

An RBI paper found that clarity of communication works well as a central bank tool when policy rates are low, but needn't when they go higher. Too little ambiguity may even be risky

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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