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Informist, Wednesday, Nov. 20, 2024

NEW DELHI – India's overnight indexed swap rates in the one-year segment, a market bellwether for interest rates, are the most impacted by monetary policy communication on inflation, according to a paper by the Reserve Bank of India staff. The impact is most during the tightening phase of monetary policy, rather than during a neutral or easing policy cycle, the paper said.

"It (the empirical evidence) shows that policy communication matters more for medium-term OIS rates, which are significant from market expectation dimension," said the paper, titled 'Dynamic Landscape of Monetary Policy Communication in India'. The authors studied the impact of monetary policy communication between October 2016 and August this year.

The data showed that the impact of CPI communication on the one-year OIS rate is three times more during a tightening cycle than it is when the Monetary Policy Committee is easing financial conditions. In a neutral cycle, the comments on inflation are insignificant on the movement in swap rates, the data from the paper showed.

Meanwhile, the movement in the weighted average call rate is a major change for one-three month swap rates, while the communication or forward guidance from policymakers takes precedence in swap rates maturing in six months or more. The correlation of market expectations is much greater to the monetary policy commentary on inflation than it is on the tone on growth, across OIS tenures, the paper showed.

"On the contrary, the OIS rate is found to be weakly related to communication tone on growth, which is statistically insignificant," the paper said. "Further, the combined tone also does not show any significant correlation with change in OIS rate at any tenor."

The paper also gauged the topics of the MPC's communication in various phases – the pre-COVID period starting October 2016, during the COVID-19 pandemic between March 2020 and February 2022 and the next period until August as the post-war period, after hostilities broke out between Russia and Ukraine.

India's rate-setting panel cut the policy repo rate in 2019 and 2020 following a slowdown in the country's GDP growth and the onset of the pandemic. It then hiked the policy repo rate by 250 basis points to 6.50% between May 2022 and February 2023, before keeping rates on hold and the stance unchanged at 'withdrawal of accommodation' until October this year.

Inflation has been the primary topic of communication from the MPC in the pre-COVID and post-war periods, the paper said. Growth took centre stage during the COVID-19 period, with inflation playing second fiddle. Commentary on liquidity conditions was also a key part of the middle period, along with COVID-19 itself. While monetary policy communication has focused on the external sector around 15% of the time across all three phases, financial markets were barely spoken about during the COVID period. They have now increased to 11.1% of communication post the war from 8.7% pre-COVID, the paper said.  End

Reported by Aaryan Khanna

Edited by Avishek Dutta

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