A unique teleconference hosted by the Reserve Bank of India (RBI) on Monday is one good indication of how governor D. Subbarao is trying to change at least one aspect of the central bank’s culture. The RBI governor fielded questions from around 400 economists and analysts who logged in from around the world a few days after the Indian central bank started exiting from its loose monetary policy.
The head of research at a foreign brokerage later told me that he was pleasantly surprised by Subbarao’s willingness to engage with those who had logged in and his efforts to at least partly lift the veil of secrecy that central banks usually operate behind.
Subbarao had in a July interview with Central Banking magazine identified three things that he would like to do in his first three years as governor. One, help RBI get greater proficiency in managing policy in a globalized context. Two, make it more transparent by improving communication at both the technical and non-technical levels. Three, demystify the office of the governor. The Monday teleconference seems to be one attempt to bridge the information gap between the central bank, on the one hand, and the financial markets and society at large, on the other.
The central bank is also trying to take its message to ordinary citizens. In early December, Subbarao went down to Jalanga, a village in Orissa, to talk to children at the village school about what RBI really does. Meanwhile, deputy governors Usha Thorat and Shyamala Gopinath visited villages in Maharashtra and Punjab, respectively.
RBI has often faced flak for its lack of transparency. Economists Nergis Dincer and Barry Eichengreen have rated RBI low on transparency. The Raghuram Rajan committee’s report on financial sector reforms cited this study to argue that while the Dincer-Eichengreen report should not be taken literally, “it does point to some concerns about monetary policy transparency in India”.
International Monetary Fund (IMF) staff economist Helene K. Poirson penned a particularly sharp critique in February 2007. While admitting that RBI’s communication strategy was on a par with global best practices in many areas, she also pointed out several areas where matters could be improved. The Indian central bank has not taken up all the suggestions offered—and nor should it be expected to. But what is interesting is that it has in recent years made several changes to take it closer to global best practices.
Here are a few examples from the latest policy statement announced on 29 January. One, the needless overlap between the policy statement and the economic review that RBI releases a day before the monetary policy has been done away with. “This policy review should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank,” Subbarao said in his third quarter review of the monetary policy for 2009-10.
Two, the result is a shorter and more succinct monetary policy statement, which is forward-looking rather than a retelling of what happened in past quarters. Three, the central bank’s monetary policy stance is stated clearly in three well-written paragraphs. Four, better information is now available to those who track monetary affairs. The outlook for domestic growth and inflation is now available in a new format. RBI has provided baseline forecasts, but also alternative paths of growth and inflation based on the confidence intervals assumed in the statistical treatment of data. Such probabilistic thinking is welcome, especially since we saw in the past couple of years how forecasters kept changing their numbers as the global economy moved from bubble to bust to recession to recovery.
Of course, some of these initiatives predate Subbarao. I had written in an earlier instalment of this column how the central bank was surveying housewives to gauge inflation expectations and professional forecasters to get an idea about private sector expectations about economic trends. All these moves to open the doors of the citadel are welcome.
There is much more to be done. Many global central banks provide minutes of their internal discussions on monetary policy on their websites. The Bank of England has opened up the econometric models that its monetary policy committee uses to crunch data and then recommends policy action. Though not central banks, the World Bank and IMF publish blogs on their websites to keep up the necessary communication with stakeholders.
Central banks cannot be completely transparent, since part of their job is to keep economic agents guessing. But they cannot be temples of secrets either. The Indian central bank started its journey towards more transparency about 10 years ago, but the process seems to have accelerated.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at firstname.lastname@example.org