The Reserve Bank of India (RBI) has enhanced and strengthened its transparency and disclosure practices considerably in the post-reform period after the mid-1990s and, thereby, enlarged the open area of two-way communication with the market.

First, the RBI publishes extensive data and information on the central bank's operations periodically. Second, the policy statements have detailed pronouncements and clear statements of stance. Third, the interventions have become more frequent — the two half-yearly statements have now increased to twice a quarter. Finally, such assessments bring out both the upside and downside biases and risks to the RBI's own outlook and projections as also the policy dilemmas.

Speeches by Top Management

One key element of the RBI communication has always been the speeches delivered by top management in different fora. The media eagerly looks forward to such speeches and pick up insights into policy-making. Many a time, such speeches were path-breaking, at times, confronting the public policy environment to bring about desired changes, and establishing the credibility and autonomy of central bank's operations.

The former RBI Governor, Dr C. Rangarajan , in 1993, came out forcefully in favour of procuring greater autonomy for the central bank in his Kutty Memorial Lecture. This paved the way for setting the limit for net issue of ad hoc treasury bills, putting an end to automatic monetisation of government deficits.

Dr Y. V. Reddy , while talking on dilemmas in exchange rate management on August 15, 1997, in Goa, subtly raised the issue of whether the rupee was overvalued or not and pronounced that, as per the Real Effective Exchange Rate (REER), it would certainly appear so, irrespective of the base chosen. This paved the way for a much-needed correction in the rupee exchange rate which helped to tide over the impact of Asian financial crisis shortly afterwards.

Dr Bimal Jalan, spoke less compared to others, but made his strategic thoughts on exchange rate and reserves management policies from time to time. While speaking at the symposium of central bank governors in London on July 5, 2002, with considerable foresight, he enunciated three fundamental requirements, quite unconventional at that time, for a country to prevent a financial crisis: First, careful monitoring and management of exchange rates without a fixed target or a pre-announced target or a band with ability to intervene, if and when necessary; second, a policy to build a high level of foreign exchange reserves which takes into account not only anticipated current account deficits but also “liquidity at risk” arising from unanticipated capital movements; and third, a judicious policy for management of the capital account, discouraging short-term capital for financing investments and encouraging foreign direct investment and portfolio investment. It is now history that these home-grown principles stood the test of time and entrenched in Indian policy-making since then.

Dr Y. V. Reddy, as Governor from 2003 to 2008, had brought out the risk of global imbalances and mispricing of risks in global markets that enabled him to keep a tight leash on monetary policy stance throughout this period.

Dr Duvvuri Subbarao , with his forthright views expressed on several occasions on the role of the RBI in financial stability, promoted amendments to government's intervention on financial stability issues and helped reconstitution of the Financial Stability and Development Council.

Who Spoke on What

The RBI, in the archives section of its Web site, provides a complete list of speeches by top management, at least from 1997. Governors have delivered in all 172 speeches since 1997 and Deputy Governors as many as 322 speeches.

A subject-wise distribution of speeches shows that in order of priority, banking, with 122 speeches, topped the list. Monetary policy attracted only 33 speeches, perhaps because there are regular policy statements issued on the subject. The other major subject areas were Indian economy (65), financial markets (55) and financial sector reform (33)

Functional Delegation

There has been a welcome functional diversification in communication in the recent period. The Communications Policy of the RBI has enunciated the following broad principles: The Governor and Deputy Governor in charge of monetary policy are the only spokespersons on issues relating to monetary policy and the exchange rate; Deputy Governors are the spokespersons in their respective areas of responsibility; and the Executive Directors (EDs) and heads of departments speak only with explicit authority from the Governor/Deputy Governors.

Speeches by EDs were obviously rare till 2009 and, thanks to some activism of Mr Deepak Mohanty and, of late, Mr. G. Padmanabhan, there were as many as 23 speeches by EDs in the last about two years.

Mr Mohanty has been the key architect of the recent changes in operating procedures of monetary policy and has, appropriately, brought out the rationale behind the new operating procedures and the main challenges that need to be recognised. He has observed that the transmission of policy signals is most effective under deficit liquidity conditions and the challenge is to keep the systemic liquidity in a deficit mode consistently.

Any prolonged phases of autonomous liquidity infusion due to sustained capital inflows or liquidity drain due to persistent surplus of government cash balances would call for creating the capacity to conduct operations through instruments such as outright open market operations, market stabilisation scheme and cash reserve ratio, besides a scheme of auctioning government cash balances. There is a need for further deepening of financial markets by removing structural rigidities coming in the way of market determination of interest rates.

Drawing attention to the debate on internationalisation of rupee, Mr Padmanabhan has observed that international interest in the Indian rupee and emerging off-shore markets are consistent with progressive globalisation of the Indian economy and the efforts must be to bring all genuine users seeking to hedge underlying exposures on-shore.

Such speeches have further strengthened the Communication Policy of the Reserve bank and help in providing forward guidance to market participants.

(The author is Director, EPW Research Foundation. The views are personal.)

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