In keeping with the tone of the first quarter monetary policy review, Reserve Bank of India governor D Subbarao has told top officials of the central bank that policy communication hereafter would ensure that markets aren’t kept guessing about the central bank’s moves.
Subbarao spoke to senior officials of the central bank at the bank’s central office on July 29 at an event to mark the Diamond Jubilee year. Several analysts praised the forthright and clear communication in the monetary policy review, which signalled rather clearly that central bank was prepared to withdraw the monetary accommodation provided since October.
“While we had advocated RBI to lay its cards on the table, we admit to being positively surprised by the clarity and candour inherent in the policy document and governor’s post-policy comments,” wrote A Prasanna of ICICI Securities Primary Dealership in a note.
“Taken together, this amounts to RBI giving notice to financial markets that the countdown has begun for withdrawal of accommodation. While articulating such a thought process required considerable dexterity on RBI’s part, the tricky part lays ahead, viz., timing and sequence of monetary accommodation.”
Some analysts said Subbarao’s stand is in slight contrast to the reputation his predecessor YV Reddy had earned for his penchant for keeping the markets guessing. In fact, Reddy himself had quipped that he was always surprised by the market’s surprise at the central bank’s stance or measures during his tenure.
Reddy had several times flagged issues relating to the extent of clarity a central bank can offer on its policies. He flagged a debate on predictability and “credibility bonus” of a central bank and the consequent impact on asset prices.
Some RBI officials opined that this seeming shift in stand was a practical one, especially in the time of high uncertainty. “Reddy’s stance on keeping the market guessing had paid off.
Only time will tell if the present governor’s straight appearance will yield desired results,” an official said. In fact, the governor has commented several times to the media that his intention is not to shock or surprise the market.
All RBI actions will be in consultation with the market and be transparent, Subbarao often said. To cite an example, this is the first time that details of bankers’ meeting with the RBI governoron the policy day have been included in the monetary policy press release. Earlier, the press release distributed at the governor’s media interaction after the policy review would only have highlights of the policy document.
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