“The RBI’s monetary policy communication practices have largely mirrored global best practices in terms of publishing the analysis of evolving economic conditions, including outlooks for growth and inflation and the associated risks,” Patra saidin a speech titled “High-Level Policy Conference of Central Banks in the Global South” organised by the Reserve Bank of India as a part of commemoration of its 90th year at Mumbai.
A paper co-authored by RBI economists Shweta Kumari and Sandhya Kuruganti and published in the RBI monthly bulletin highlighted the primacy of targeted and precise central bank communication in setting market expectations on pricing – and the likely direction of rates.
“The communication tone on inflation is found to play a significant role in shaping up market expectations, especially for medium term rates,” said the paper authored by the RBI economists.
The analysis, in a paper titled the “Dynamic Landscape of Monetary Policy Communication in India,” shows content and emphasis on topics varied in monetary policy committee (MPC) deliberations, depending on emerging conditions and uncertainties due to unprecedented crisis episodes.
“Assessments based on a text-mining approach indicate that the degree of transparency has been progressively enhanced, especially after the adoption of the flexible inflation targeting (FIT) framework…Nonetheless, the RBI has emphasized on clarity in communication, while maintaining a balance between both high- and low-frequency communication of monetary policy,” Patra said. Inflation followed by growth remained the central topics of discussion at MPC reviews during the pre-pandemic period. This sequence reversed during the pandemic episodes, and liquidity and Covid received attention. The geopolitical crisis in 2022 and the resultant inflationary pressures shaped subsequent MPC discussions, with inflation returning as the core topic, while the focus on external linkages also increased.
“The communication tone on inflation is found to play a significant role in shaping up market expectations, especially for medium-horizon OIS rates. The impact of communication is observed to be higher during the tightening phase,” said the authors of the report in the latest monthly bulletin.
The RBI maintains the opinions expressed in the study represent the views of the authors – not necessarily those of the central bank.
Inflation remained the central topic of discussion, followed by growth during the pre-pandemic period. This sequence reversed during the pandemic episodes, and liquidity and Covid topics also received attention.The geopolitical crisis in 2022 and the resultant inflationary pressures shaped subsequent MPC discussions with inflation returning as the core topic, while focus on external linkages also increased.
“ The communication tone on inflation is found to play a significant role in shaping up market expectations, especially for medium-horizon OIS rates. The impact of communication is observed to be higher during the tightening phase” the authors said in the paper published in the latest monthly bulletin where the views are their own and not necessary of the central bank.