Central banker of a country often talks the market
Explanation in Indian context
Course: Money, Banking and Financial Markets
Submitted By: Karthik Y
Nidhi Dangayach
Nidhi Sharma
Rakesh Dharavat
“Communication is not just about transparency. It is also about education, guidance and steering things in the right direction. In this, the central bank can be an honest broker between the government and the public and even the parliament.”
- Dr. I. G. Patel
The last decade has witnessed a radical shift in the way central banks all around world function. This paradigm change has implied not only a change in the strategies adopted and pursued by central banks, but also in the way in which central banks have implemented their respective strategies. For instance, the US Federal Reserve, since 1994, appears to have been providing forward guidance1, while the European Central Bank appears to be in the mould of keeping the markets informed rather than guiding it. The RBI has taken a middle path of sharing the analysis in addition to information, but has never preached and guided the market participants. In doing so, the RBI gets the benefit of the process of two-way communication, of information as well as perceptions, between the market participants and the RBI. The two-way process is enabled by formal structured meetings with industry associations, through standing advisory committees, and informal / ad hoc committees, technical reports, working groups, etc.
Apart from greater independence or otherwise, one key element in this process has been the move towards increased transparency. Transparency, which may be defined as the absence of asymmetric information between policy makers an ...