The Reserve Bank of India’s tomes on interest-rate policy made Subir Gokarn despair when he was a Standard & Poor’s economist. Now a deputy governor, he’s part of the biggest communication overhaul in the bank’s 77-year history. “That really wasn’t the best way to do it,” Gokarn, who joined the RBI in 2009, said in an interview last month. “Keep it short, keep it straightforward, so it takes five, 10 minutes to read and most people read it.”
Snappier, more frequent reviews of rate decisions and the introduction of guidance on direction are part of an effort by Governor Duvvuri Subbarao to make monetary policy more predictable and credible in Asia’s third-largest economy. The campaign hasn’t been flawless: Gokarn wrong-footed analysts on January 5 by signaling that a reduction in lenders’ cash-reserve ratios would be “premature,” only to cut them 19 days later.
At stake is reducing the RBI’s gap with practices abroad as foreign investors have an increasing role in India’s government-debt market, with their holdings soaring more than sixfold since Subbarao took over in September 2008.
“The RBI has improved significantly in terms of clarity and frequency of market communication,” said Jahangir Aziz, chief India economist for JPMorgan Chase. “There have been rather glaring flip-flops by RBI at times while the market for a long time, and in some cases even now, hasn’t fully got used to the new rhetoric.”
On Subbarao’s watch, RBI has doubled the number of scheduled monetary policy meetings each year, to eight. It now releases minutes of a key advisory committee, and started regular media and analyst briefings. “The changes RBI has enacted have helped improve the perception of external investors,” said Dhawal Dalal, head of fixed income at DSP Blackrock Investment Managers. “They are trying to make the system safer.”
A relaxation of limits on purchasing debt saw international investment in government and corporate debt surge to a record $31.5 billion in February, from $5.1 billion in the month Subbarao succeeded Yaga Venugopal Reddy.
Investors also have been lured by yields on benchmark 10-year government securities that are more than twice that of China and South Korea and about four times the rate on similar-maturity US Treasuries. Indian government bonds are Asia’s second-best performers this year after Indonesia, among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.
Subbarao, who pledged greater clarity after taking office, increased the number of scheduled monetary policy reviews in July 2010. Two months later, the central bank gave its first guidance on future action, saying tightening to damp inflation had “taken the monetary situation close to normal.”
