A thin line divides openness and what can be seen as an attempt to talk up the market
One of the first promises that Raghuram Rajan made when he assumed office as Governor of the Reserve Bank of India (RBI) was to enhance transparency and communication by the central bank. “…the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office,” Dr. Rajan said the day he assumed office.
And he has kept his word. He has already met the media five times in the two months that he has been Governor and that includes an exclusive interview with a television channel. That would be roughly equal to the number of times his predecessors met the press over a whole year. Central bankers, as a breed, are known to be reticent but Dr. Rajan’s communicative approach has been a refreshing change and the media is having an extended honeymoon with him.
Apart from his interactions with the media, the governor has also been active in the lecture circuit, in India and abroad. Together, these have ensured that the public and the markets get an insight into the RBI’s thinking on different policy issues. Information is the lifeblood of markets and constant communication from the RBI can only mean well for their efficient functioning.
The market interprets every word that a central bank governor utters and often it reads between the lines of public speeches and quotes to get an insight into his thinking. Remember the famous “irrational exuberance” quote of Alan Greenspan and the effect that it had on the markets?
Thus, if central bankers are circumspect in public and minimise their media interactions, it is with reason.
They would rather be known for what they do or don’t do rather than for what they say or don’t say.
Indeed, there is a power that central bankers wield over the markets with their reserve; the markets are left second-guessing the central bank’s intentions and often play into the latter’s hands. In central banking lexicon, silence also means communica- tion.
Taming the bull
It is in this backdrop that the openness of Dr. Rajan has to be seen. As someone who understands the markets well and has studied it closely in his previous avatars, Dr. Rajan is attempting to engage with it now. He is trying to communicate as much as he possibly can of his thinking and thus trying to define the boundaries of engagement.
In short, he’s trying to exercise the same control over markets with his communication which his predecessors did with their reserve.
Yet, the problem is that there is but a thin line between free communication and what can be seen as an attempt to talk up (or down) the market.
Take for instance, Wednesday’s press conference that he held in the backdrop of the renewed rupee volatility. It was obviously an earnest attempt to communicate that there was no basis for the volatility in the forex market and that the fundamentals, if anything, have improved.
Sugar, not salt
His opening remarks were clear: “There are issues we have to worry about and there are issues we should not be so concerned about. It is important that the RBI clarifies its interpretation of economic events and the likely direction of policies at times of uncertainty so that the market worries about the right things and does not get into a tizzy about the wrong ones. That is my goal today.”
Dr. Rajan’s wanted to convey that things were under control. And it worked. The rupee bounced back smartly from a nine-week low of 63.88 versus the dollar and bond yields dropped sharply.
Yet, there were also sections of the market which saw the governor’s press conference as an attempt to talk up the rupee and reverse its direction. Now, the RBI has always said that it is only concerned with volatility and not with setting a direction for the currency. So, was this a departure in policy?
Draining the well
Dr. Rajan, given his tremendous academic credentials and track record, enjoys a reputation and goodwill that few governors before him did. He is drawing on that liberally now and the market is listening to him.
Yet, the danger is that he will draw too much of it too soon and be left with nothing when the real need arises, God forbid if it ever does.
The volatility in the rupee in the last couple of weeks was minor compared to what the currency experienced in the May-August period.
It was not serious enough for the RBI governor to go out and play on the front-foot on a dicey wicket.
A mere release from the RBI pointing out that oil company demand had been gradually put back in the market for a month now would have sufficed.
Or the central bank could have fielded one or the other of its deputy governors or executive directors to voice the same views in one of the many public lectures that they do give. The point is this: Dr. Rajan’s openness is as much a weapon as an asset and should be deployed only under exceptional circumstances. The governor is too sharp not to know this.