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Rajeev Malik: Lost in translation

Rajeev Malik  |  New Delhi 

Forget the common man, even market economists and investors suffered uncertainty about the immediate interpretation of the key message of the recent quarterly policy announcement by the RBI. Indeed, it took the usual post-policy media comments and interviews by the governor and the deputy governor to better explain the RBI's intention.
The RBI deserves credit for more frequent communication with financial markets. The move toward quarterly economic assessments and policy announcements are steps toward the right direction. However, the art of written central bank communication is a new experience for the RBI, so it is understandable if there is a bit of learning by doing. A few suggestions to improve the communication:
  • Standalone, shorter monetary policy statement: The current statements are way too long (the latest one was 71 pages), possibly because they attempt to cover too many things, from monetary policy measures to financial development initiatives. There is a pressing need for a standalone monetary policy statement; non-monetary policy measures can be issued as a separate statement.
  • Single policy interest rate: The monetary policy statement should focus on a single policy interest rate (in India's case, the reverse repo rate). By giving importance of a potential monetary signal in the repo rate and the bank rate, the RBI only causes confusion. The bank rate is practically dead, while the repo rate is not the operational monetary policy rate. The cash reserve ratio's usage is so infrequent now that it does not warrant a mention in every quarterly statement. All other central banks are able to use a single interest rate for communicating with markets.
  • Continuity in policy statements: The clarity in communication that came across in the media comments by the governor and deputy governor was conspicuous by its absence in the policy statement. Separately, there appears to be a mismatch between the concern about the inflation outlook expressed in recent statements, the guidance offered, and the actual monetary action. The bottom line is that monetary policy statements should be viewed as a tapestry of economic assessments and the evolving risks to the outlook for growth and inflation, especially when compared to the prior statements. The bureaucratic need for long, unwieldy, and all-in-one policy statements appears to have outlived its usefulness. As financial markets play a more important role in economic and monetary management, the RBI's monetary communication needs to be better targeted at financial markets and individuals.
  • Rajeev Malik is vice president and senior economist with JPMorgan Chase Bank in Singapore. The views here are personal.

    First Published: Tue, November 14 2006. 00:00 IST
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