 "RBI Guv's crafted statements boosted confidence during adverse times")
Meticulously crafted statements by the Reserve Bank of India (RBI) Governor, featuring carefully selected and emphasised words, have played a pivotal role in instilling much-needed confidence in India during periods of adversity and uncertainty, according to a study authored by RBI staff, including former deputy governor Michael Debabrata Patra.
The article highlights that the uncertainty induced by the pandemic and the Russia-Ukraine conflict led to longer monetary policy statements by the RBI Governor, which provided reassurance through confidence-building language.
“While the overall duration of press conferences fluctuated, significant improvement in the readability of transcripts was recorded over time. Market volatility on the policy announcement day remained range-bound and similar to non-policy days. Intraday volatility appeared to pick up before the start of the Governor’s statement but tapered off by the conclusion of the press conference,” the article noted.
The study found that market volatility, as measured by India VIX, on policy announcement days remained range-bound and similar to non-policy days. However, it spiked on March 27, 2020, and May 22, 2020, when monetary policy committee (MPC) meetings were held ahead of schedule due to pandemic-induced uncertainty, and sharp rate cuts were announced. The VIX showed a consistent decline in 2022 and 2023, reflecting high levels of confidence in the markets even during the policy tightening phase from May 2022 to February 2023.
The study also observed that intraday volatility typically increased before the Governor’s statement but subsided quickly, becoming almost negligible by the end of the press conference. Average volatility during the study period was low, and volatility was more pronounced on days with an element of surprise, such as unexpected changes in policy rates or unscheduled MPC meetings.
Key factors contributing to low market volatility included the targeted use of confidence-building words, the Governor’s opening remarks during press conferences, and the fine-tuning of the RBI’s communication strategy to provide assurance and confidence.
The study underscored that effective communication goes beyond being clear, understandable, and engaging. It requires a strategic approach, particularly during black swan events and crises when anxiety runs high. Reassurance during such times is essential to reinforce the significance, duration of policy changes, and the overall policy stance.