shrouded in mystery. books like “ secrets of the temple ” ( greider, 1989 ), and expressions like “ monetary mystique ” ( goodfreind, 1985 ) bear testimony to this. it was in fact widely believed that communication from the central bank needs to be couched in terms of “ constructive ambiguity ”, a term coined by chairman gerry corrigan of the new york fed. one is reminded of what alan greenspan said, “ the undeniable, though regrettable, fact is that the most effective policymaking is done outside the immediate glare of the press " ( greenspan, 2002 ). it was felt that earlier that policy effectiveness depended on the degree of surprise with which the market was taken by central bank policy announcements. in fact, it is quite remarkable to note that prior to 1994 the target federal funds rate was not even announced by the us federal reserve : the market was left to infer the rate from the timing, sequence and magnitude of its open market operations ( woodford, 2005 ). now, however, the u. s. federal reserve not only announces its current target fed fund rate but also provides a clear indication of the likely trajectory of future interest rates. such has been the revolution in central bank communication practice over the last ten to fifteen years. 1 / 9 since the late 1980s and early 1990s the widely perceived iron wall of central banks ’ communication has become much thinner, along with the fall of the iron curtain. from the current vantage point we can clearly discern three reasons for this change : • first, the clamour for and attainment of central bank independence has imposed a great degree of responsibility on the central banks – a major one being the attainment of transparency in communication. • second, adoption of inflation targeting by a number of central banks since the 1990s made effective communication an integral part of policy making. monetary policy committees were formed and minutes started being published. • third, the innovations in information and communication technology made the speed and form of communication from central banks quite revolutionary. from the print medium and television the new entrants of transmission have been the web - sites of the central banks and the wire agencies like reuters and bloomberg. this change in thinking has occurred with the enhanced perception that " central banks affect the economy as much through their influence on expectations as through any direct, mechanical effects of central bank trading in the market for overnight cash " ( woodford, 2005 ), or through their specific announcements on the

##ity ( annex ). thus, it was communicated that rbi was keeping in touch with major settlement banks and the stock exchanges to ensure that payment obligations on the exchanges were met and gave assurance of selling dollars through agent banks in order to augment supply or intervene directly to meet any demand supply imbalances. these press releases were placed on the web - site around 2. 00 p. m, but were released to wire agencies half an hour earlier and were flashed in all the tickers by 1. 30 p. m. trading had resumed by that time at 1 : 16 pm ; subsequent to the flashing of the press release, the market witnessed a quick recovery, before closing at 4505. whereas i am not claiming the entire recovery in the sensex on that day to be solely due to the communication from the rbi, it is important to understand the role and power of such communications when there are occasions when central bank communication can have immediate impact on the market - that too on a market that is not strictly under its jurisdiction. central bank communication has its flip side too. the modern day paparazzi - syndrome haunts central bankers as well. i am sure that many of the central bankers must have at some point of time must have bitterly surprised to find in the next day ’ s newspaper some statement that was ascribed to him or her – whereas the truth could be entirely opposite. let me illustrate this with a personal experience – one among the few i have experienced during my stay in rbi. on august 14, 2004 i was at the annual citibank - fitch debt market conference. on my entry i was chased by the journalists and one of the questions i was asked was about the future rate of inflation. to the best of my recollection i said that the present rise in inflation was predominantly driven by supply - shocks and that we were monitoring the developments carefully. to my utter surprise, a pink paper in the next day ( i. e., august 15, 2004 ) reported a story with the photographs of the president of india and mine side by side, with the following catch lines : • “ president apj abdul kalam said on saturday that sustaining a high eight per cent growth and containing inflation, now at 7. 61 per cent, were the major challenges for the country. ” • “ meanwhile, reserve bank ( rbi ) deputy governor rakesh mohan on saturday reiterated that the authorities were expecting inflation to fall to the earlier levels of five per cent. ” the story implied that