Time for a Reserve Bank of India ‘dot plot’: 

Time for a Reserve Bank of India ‘dot plot’: 

Context:

• For the smooth running of Monetary Policy Committee, dot plot is an useful tool.

What is Monetary Policy Committee?

• On 22 September 2016, India’s monetary policy framework took a significant step forward, with the formation of the monetary policy committee (MPC).
• The committee was created in 2016 to bring transparency and accountability in fixing India’s Monetary Policy.
• The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
• It was expected that inflation forecasts and the accompanying commentary of the MPC would influence India’s public discourse and improve general understanding of how the economy works.

Why was the MPC created?

• First, a committee can represent different viewpoints.
• Second, spreading responsibility for the decision can reduce pressure that falls on an individual.
• Third, a committee will ensure broad monetary policy continuity when any single member changes

How has the MPC managed against these expectations?

• The results have been good and encouraging so far.
• The RBI has been consistent in its inflation-targeting narrative.
• The MCP is expected to adhere to the inflation “glide path” which was formulated under the previous governor, signifying continuity.
• The MPC’s track record on transparency has been impressive.

What are the drawbacks of MCP?

• There is room for improvement when it comes to forecasting.
• There is also a lack of transparency about forecasts of the key policy variable: interest rates.
• Currently, the RBI’s monetary policy stance is expressed in subjective terms as accommodative or neutral.

What is its solution?

• An useful tool to solve its drawback is a “dot plot”; a plot which shows where each member thinks the policy rate would be at the end of the year for the next few years and in the longer run.
• The dots need not be identified with individual members, as is the case for the US Federal Reserve dot plot.
• Dot plot gives a sense of future rate movements; it would be valued by markets, firms and households.
• It is amply clear that the MPC’s journey so far has been exemplary.