y v reddy : central bank communications : some random thoughts keynote address delivered by dr y v reddy, governor of the reserve bank of india, at the regional seminar on central bank communications sponsored by the international monetary fund, mumbai, 23 january 2006. * * * ms. wanda tseng, mr. ariyoshi, distinguished fellow central bankers and friends, at the outset, i would like to extend a hearty welcome to all our guests to india. i hope you will find the weather outside as well as the intellectual stimulation in the seminar pleasant and productive. i am thankful to the organisers for inviting me to participate in the seminar. the subject is close to our head and heart and we, in the rbi, had organized a saarcfin sponsored seminar last year on this subject, and we learnt a lot from each others ’ experience in south asia. today ’ s seminar is different, and may perhaps prove to be specially rewarding for several reasons : it covers a wider range of central banks, and has the benefit of participation by multi - lateral institution as well as the media representation, in addition to a private sector bank. the organisers need to be complimented on an excellent structuring of the seminar in terms of issues, classification and participation. i find the key questions for consideration listed in the programme very pertinent, and so, perhaps it is ideal for the keynote address to outline some random thoughts on the questions, based on our experience in the reserve bank of india ( rbi ). in the past, central banking was shrouded in secrecy with some ‘ mystique ’ surrounding it. in the recent years, however, there has been greater visibility, transparency and communication. what are the reasons? first, increased independence of central banks warranting publicly accountable conduct ; second, adoption of inflation - targeting – whether through a legal sanction or otherwise ; third, a mandate to the central banks, either explicit or implicit, for maintaining financial stability in a world where the financial markets and their expectation matter. it is interesting to note that even in the uk, where there is a financial services authority, it is the bank of england which publishes the financial stability report, periodically. what are the theoretical perspectives in this regard? the academic and policy literature recognises the role of communication for the effectiveness of monetary policy, and has broadly focused on four aspects of policy, namely, efficiency, time - consistency, optimality of communications, and institutionalcum - decision making processes. efficiency issues

associations, through standing advisory committees, and informal / ad hoc committees, technical reports, working groups, etc. at this stage, i must share with you one concern about the credibility bonus earned by the effective communications policy. is it possible that such “ hands on ” and “ very successful ” communications by the central banks in the world to maintain financial stability have resulted in under - pricing of risks by the private sector, or in distinct lowering of aversion to financial risks? is it possible that this credibility bonus is partly responsible for the upward movement of the housing and equity prices becoming a global phenomenon? the issue of financial stability is of great significance and enormous complexity for central bankers in the emerging market economies ( emes ). the emes vary considerably in their fiscal, current account, openness to external sector, and dependence on oil - earnings or oil - imports. yet, the analysts in the financial markets often treat them as a group, presumably because the emes are perceived to be to be high - risk and high - reward destination for financial capital. that characteristic lends them to vulnerability in capital flows, sometimes for reasons other than economic fundamentals in the country concerned. as the title implies, the emes are emerging from one state to another, namely, from less market orientation to greater market orientation, and are thus, in a state of transition. the central banks in the emes, in their pursuit of financial stability, have two additional challenges. first, to mange the transition in their own economies, which has socio - economic as well as political dimensions ; second, to keep a watch on the sentiment of foreign capital flows – which could change for reasons other than domestic. while for a particular foreign investor it may be a small portfolio shift from an eme to an industrialised country, it may be one of large magnitude for the eme concerned. the challenges for communication policy are considerably more complex for the central banks in the emes for another reason, namely, the asymmetrical response of the financial markets to the developments in the emes. for instance, the market reaction to an increase of, say, us dollar five billion in the forex reserves of an eme would be comparatively subdued vis - a - vis the response to a decline in reserves by a like amount. in india, several measures, monetary as well as administrative, were undertaken to meet the threats to financial stability while complementary or parallel recourse was taken to communications. some illustrations are :