Lengthier The RBI Policy, Greater Is The Market Volatility

The Reserve Bank of India has come a long way from the days when monetary policy statements would average 13,000 words.

That’s more than the average length of a Masters thesis in economics and was before the adoption of inflation targeting in 2016.

Since then, the central bank has become briefer and less complex in its policy communication, according to a recent paper published by the Indira Gandhi Institute of Development Research in Mumbai.

RBI statements have averaged 3,084 words in the post-inflation targeting regime, still pretty high if compared to the Federal Reserve’s average of 500 words, the paper’s authors Aakriti Mathur and Rajeswari Sengupta say.

The readability of the RBI’s statements — based on the number of one syllable words in the text — has also improved.

Text length & volatility

The researchers matched the policy communication against financial market performance and found that longer and more complex statements were associated with greater volatility in stock market returns over the past 20 years.

More specifically, a 1 per cent increase in the length of the RBI’s policy statements, or roughly about 115 words, correlated with a 0.37 per cent increase in equity market volatility in the week after the statement. “If the statements are on average too long or too complex to comprehend, then the transmission to financial markets is likely to be weak, which is what we find in our empirical analysis,” the authors say in the report.

“Long and complicated communication on the economy make it difficult for investors to understand the regulator’s position. This creates a wider degree of dispersion in participants’ beliefs, which gets reflected in higher financial market volatility,” they said.

Six-member panel

With the introduction of inflation targeting, the RBI set up a six-member Monetary Policy Committee to decide on interest rates every two months.

The policy statement is followed shortly after by a press conference by the central bank governor and his deputies. The RBI also releases minutes of each meeting within two weeks of the event, disclosing how each member voted and why.