In the last few months, inflation has raged across the world leading to frenetic action from central banks. In the last fortnight, central banks across the US, England, Australia, Iceland, India, Brazil and Colombia raised policy rates. While Reserve Bank of India watchers are busy analyzing future policy decisions, it is also important to focus on the Indian central bank’s communications in these trying times.
For the most part of central banking history, communications barely played any role in monetary policy. Central bankers actually prided themselves in confusing markets. That approach began to change after the advent of inflation targeting in the 1990s which implied central banks had to make policy targeting inflation in the future. The change also meant communicating policy, especially to the financial markets and media about the direction of policy, became essential. This led to central bank officials holding interactions with media/markets post-monetary policy decisions, giving speeches at various financial market fora and so on.
At the time of the 2008 crisis, central banks were criticized as their policies were seen helping only the financial markets. Fault lines were laid between Main Street and Wall Street followed by protests across advanced economies. Being pushed into a corner, central banks widened the communication canvas to include the public.
Communicating to the public is a different game as one has to not just simplify the policy message but also do it consistently over a long period of time. Central banks came out with different communication tools to appeal to the public. This included writing blogs, creating videos and making websites more interactive. The US Federal Reserve and European Central Bank even organised public seminars to receive feedback from the public.
How has the RBI done?
Until 2008, central bank communications were not the focus of RBI’s agenda. Having said that, RBI did follow other central banks in terms of communicating with the media and markets by holding regular post-policy press conferences and officials giving speeches in various financial fora. Central bank communications became a focal point under the tenure of Governor D. Subbarao (2008-13). The global financial crisis demanded clearer communications from the central bank. Before Subbarao, RBI released two documents after the monetary policy review: press statement and a full document covering all the analysis. The press release was replaced by a Governor’s statement which was shorter and more engaging. RBI also started teleconferences with researchers and analysts post policy. The next Governor, Raghuram Rajan continued with this endeavor and further shortened—and more importantly, simplified—the Governor’s statements.
The next major change came with adoption of Inflation Targeting framework (ITF) in October 2016 under the new Governor Urjit Patel. Under ITF, the government constituted a 6-member monetary policy committee (MPC). The Governor’s statement was replaced by ‘Resolution of the Monetary Policy Committee (MPC)’ followed by Minutes of the MPC after two weeks. RBI also started issuing a Monetary Policy Report (MPR) biannually.
While RBI continued with its media interaction, it discontinued the teleconference with researchers and analysts. In 2019, with the new Governor Shaktikanta Das, both the Governor’s Statement and teleconference with researchers made a comeback. However, the pandemic once again led to undoing of the teleconference.
Ideally, one would expect that ITF will lead to higher transparency and simplicity in RBI communications as seen in case of other inflation targeting central banks.
However, this has not really been the case with RBI. As the communications shifted from Governor’s office to the MPC, efforts have not been made to simplify the communications from MPC and RBI. All the documents released after the policy are not easy to read as they contain economics concepts and jargons. The Governor’s statement is slightly simplified but is wordy and reads a lot like statements before 2008.
When we compare RBI’s communications to those of other inflation targeting central banks such as New Zealand, England, Canada, Australia etc., we can see the differences. For instance, the central banks of England and New Zealand release a visual summary of monetary policy decisions to explain the decision to the public. Early research has shown that these visual summaries have helped people understand the policy. Likewise, post-policy messages from the Governor are succinct, simplified and interactive.
There is another trend which has occurred in the last thirty years of inflation targeting. From the 1990s to 2008, the policy priority was to bring inflation lower towards the target. From 2008-20, the policy priority, especially in advanced economies, was to raise inflation towards the target. Post pandemic, inflation has surged to higher levels last seen 30-40 years ago. These changes in inflation levels have created problems in communications.
Central banks have had to switch their policy message from keeping inflation low to bringing inflation high and back to keeping inflation low. These changing inflation trends have also led the central banks to think of new ways of communicating. The RBI has not faced these challenges as here the task usually has been to bring inflation lower to the target of 4 percent.
To sum up, central bank communications have come a long way from being an ignored tool to an important tool of monetary policy. Central banks will be using this tool actively to ensure current high inflation numbers do not translate into high inflation expectations and undermine years of hard work on anchoring inflation expectations to the target. As RBI continues its own inflation management journey, it should learn from the communication approaches of other central banks. The art of communications is even more critical in case of out of turn monetary policy decisions as taken by RBI recently.
Amol Agrawal is faculty at Ahmedabad University.
Views are personal and do not represent the stand of this publication.
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