RBI takes another step in a long road to transparency

The Reserve Bank of India has taken one more step in becoming more ‘open' and ‘transparent' by releasing the minutes of its Technical Advisory Committee on Monetary Policy for the first time ever. The committee meeting was held a month ago and the minutes released this Tuesday. The minutes will, from now on, be put up on RBI's Web site one month after each meeting.

But before you think the RBI is laying its secrets bare, remember the committee is advisory in nature — so its recommendations are not binding on the RBI. The committee does not have any voting powers. The decision on rate hikes or cuts or other moves will be made solely by the Governor and RBI.

While looking at the minutes, one begins to experience a dreadful sense of ennui — It seems to be one more committee of hand-wringing experts who express ‘concern' on inflation and the rising current-account deficit, among others, and think ‘somebody should do something about some of these things'. It is natural at this point to wonder if any earthly purpose would be served by putting out minutes of such committee meetings.

A continuing journey

Yet, this marks one more step in a continuing journey towards clearer communication and transparency for the central bank. Global experience suggests that as economies develop and as markets get more liquid and deep, market players need regular signals from the central bank (rate decisions, rationale, indicative targets, and forward guidance) in order to ensure a certain degree of certainty and stability in financial markets. Ambiguity and opaqueness are not the celebrated central banking virtues they once were. And what markets detest most, apart from these things, are being taken by surprise and facing uncertainty. Many central banks have, therefore, started to put out minutes of their policy meetings to enable a steady stream of information flow.

For instance, the Federal Open Market Committee (FOMC) of the US Federal Reserve, which formulates monetary policy for the US, provides minutes three weeks after each of its eight scheduled meetings every year. Similarly, the monetary policy committee of the Bank of England meets once a month and minutes are put out a fortnight after the meeting.

Signals for the market

By allowing participants a peek into the deliberative process that precedes the announcement of a rate decision, central banks seek to prepare the ground against any volatile reaction that can cause disruption. At the same time, those who are part of the deliberations may feel constrained and possibly a bit stage conscious, if they know that every word of their debate is going to be put out in the public domain. There is a danger of either being over-cautious or playing to the gallery and focussing on securing their own place in ‘history' rather than providing a dispassionate look at the problems on hand!

In the US, the demand for transparency has sometimes been taken to extreme lengths, including asking the FOMC to conduct its affairs in public and even open its deliberations to live TV coverage.

The FOMC has, however, come a long way from the time a couple of years ago, when it would never publicly announce any policy moves or changes and these things had to be ‘inferred'. The minutes of this meeting used to be released about six weeks after the meeting — far too long to be of much use for financial markets. As a compromise, the committee now announces its decisions immediately after each meeting, while the minutes are available three weeks after regular meetings and all the transcripts for a year are available after five years.

There is some information in the minutes on who in the committee voted for and against rate moves and policy action. Over a period of time, from these minutes, market players and analysts form their judgement on who among the committee is a ‘hawk' and who is a ‘dove' on inflation and make predictions on how the Fed or Bank of England will swing. In India, voting powers have still not been granted. So we are still some distance away from being able to look at a person's voting record and deciphering what the RBI will do. Who knows? Maybe that too will come about in a few years in their usual ‘calibrated' manner.

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