Forward guidance not always a positive sum game: Subbarao

Duvvuri Subbarao, the governor of the Reserve Bank of India (RBI), on Monday said the use of monetary policy statements by central banks to manage market expectations was not always necessarily a "positive sum game".

Speaking at the Stern School of Business at New York University, Subbarao said that while successful monetary policy required forward guidance in policy statements, central banks faced several dilemmas regarding the conditionality and wording of their intended communication. "It cannot be so vague as to lose all content value; on the other hand, it cannot be so precise that the central bank becomes a prisoner of its words and loses any flexibility to deviate from the guidance should the underlying circumstances change," Subbarao said.

Subbarao said the financial crisis had brought into sharp focus the communication dilemma at the RBI, which started giving forward guidance in early 2010. Central to the issue of forward guidance is that a central bank is handicapped by external uncertainty over which it has no control, he said.

Click here to read the speech.