What is time-based & state-based forward guidance?
In every monetary policy, the RBI monetary policy talks about the forward guidance. Put simply, forward guidance is the communication from the central bank to market about the state of the economy and the likely future course of monetary policy. It is a cue to the markets to prepare for the next policy action. In April this year, the RBI shifted from time-based forward guidance to state-based guidance. What this effectively means is that RBI will now adopt a policy approach until certain economic conditions are met, rather than giving guidance for a specific time period. This is after recognising that it is difficult in the context of the pandemic to perfectly foresee how the economy evolves.