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.
A second, and related, dilemma is how to ensure that the market correctly appreciates the conditionality and does not interpret the guidance as an irrevocable commitment. 27. Starting early 2010, in keeping with the best practice, the Reserve Bank too has begun giving forward guidance. And as expected, we too have confronted the classic communication dilemma. Let me illustrate.