of monetary policy as long as necessary – at least during the current financial year and into the next year … ”. inflation eased in the second half of 2020 - 21 in line with the mpc ’ s assessment as supply side pressures abated. the time - based element of the guidance did help to anchor market expectations and moderate undue expectations building up at that time of a possible reversal of the monetary policy stance. 21. communication exemplifying explicit forward guidance, whose role and nature is continuously evolving, came to the fore in april 2021 on the eve of the virulent second wave of infections. the mpc reverted from both state - and time - based forward guidance to state - based guidance, realising that “ it is difficult to perfectly foresee how the economy evolves and when the recovery gets firmly entrenched given the persistence of the pandemic. ” the rbi instituted a secondary market g - sec acquisition programme ( g - sap ) which provided an upfront commitment to a specific amount of open market purchase of government securities, in order to assuage market concerns on the size of the government borrowing programme for 2021 - 22 and its impact on interest rates in the bond market. this measure, combined with the explicit recognition that the yield curve is a public good whose orderly evolution is the shared responsibility of both market participants and the reserve bank, benefited all stakeholders by anchoring yield expectations and provided a benchmark for the pricing of other financial instruments. 22. recalibrating the pandemic time policy path, as and when the situation warrants, would present its own share of communication challenges. for rbi ’ s crisis measures announced with pre - specified terminal dates, market expectations remained anchored and communication challenges were minimal when these measures got automatically withdrawn. on the other hand, measures or unwinding of open - ended policies, as and when they happen, would require careful, nuanced and measured communication as in such instances, the expectations of certain segments of the market may not be in sync with that of the central bank ’ s assessment. illustratively, the governor ’ s policy statement of february 2021 addressed the fears of reversal of monetary policy which were building up due to resumption of variable rate reverse repo ( vrrr ) operation in january 2021, by explaining the rationale for the reintroduction of vrrr more explicitly. similarly, liquidity rebalancing was set in motion in august 2021 through periodic upscaling of the 14

to a lower neutral rate of interest. 6 by constraining the amount of policy space available to offset adverse developments using our more effective conventional tools, the low neutral rate could increase the likely frequency of periods of below - trend inflation. in short, frequent or extended periods of low inflation run the risk of pulling down private - sector inflation expectations. 7 given today ’ s circumstances, with the economy near full employment and inflation below target, how should the fomc achieve its dual - mandate goals? some might determine that preemptive tightening is appropriate on the grounds that monetary policy operates with long lags, and inflation will inevitably accelerate as the labor market continues to tighten because of the phillips curve. however, in today ’ s economy, there are reasons to worry that the phillips curve will not prove very reliable in boosting inflation as resource utilization tightens. since 2012, inflation has tended to change relatively little as the unemployment rate has fallen considerably, from 8. 2 percent to 4. 4 percent. 8 in short, the phillips curve appears to be flatter today than it was previously. 9 this is also apparent in a number of advanced foreign economies, where declines in their unemployment rates to relatively low levels have failed to generate significant upward pressures on inflation. 10 given the flatness of the phillips curve, it could take a considerable undershooting of the natural rate of unemployment to achieve our inflation objective if we were to rely on resource utilization alone. for all these reasons, achieving our inflation target on a sustainable basis is likely to require a firming in longer - run inflation expectations — that is, the underlying trend. the key question in my mind is how to achieve an improvement in longer - run inflation expectations to a level that will allow us to achieve our inflation objective. the persistent failure to meet our inflation objective should push us to think broadly about diagnoses and solutions. the academic literature on monetary policy suggests a variety of prescriptions for preventing a lower neutral rate of interest from eroding longer - run inflation expectations. 11 one feature that is 3 / 7 bis central bankers'speeches common to many proposals is that the persistence of the shortfall in inflation from our objective should be one of the considerations in setting monetary policy. most immediately, we should assess inflation developments closely before making a determination on further adjustments to the federal funds rate. monetary policy this brings me to the implications for monetary policy. a key upcoming decision for the committee is when to commence balance sheet normalization. i consider