Former RBI Governor D Subbarao 'misses' the time when his every spoken word could move the markets, but also enjoys not being governor anymore because he can now speak freely without fear of moving the markets.
Subbarao, who was succeeded by a much more outspoken Raghuram Rajan at RBI, also says that "virtually all central bank governors have taken an ego trip on the magic of the words they spoke or rued the fallout from some miscommunication".
The observation assumes significance in the wake of intense speculation that Rajan has now decided against a second term because of his various utterances not being liked by the government.
Subbarao also said some thought he was not "the uberconfident, alpha male central bank governor markets respect", while others thought that "it was, in fact, my low- key demeanor and low-profile personality that commanded respect and aided effective communication".
In a tell-tale book "Who Moved My Interest Rate?" about his five-year tenure as RBI Governor, Subbarao says, one of the nice things about being a central bank governor is that the markets hang on every word you say, treating every syllable, nuance, and twitch of the face as a market cue.
He also said: "One of the stressful things about being a central bank governor is that the markets hang on every word you say, treating every syllable, nuance, and twitch of the face as a market cue. That about sums up both the opportunity and challenge of central bank communication."
He said that experience helps but does not "guarantee that markets will not deem what you said something other than what you believe that you said".
"I learned along the way-and sometimes the hard way," he added.
Subbarao said he was largely commended in his five years at RBI for bringing a culture of openness to a conservative and inward-looking institution and was complimented for making the bank more transparent, responsive, and consultative.
He was also commended "for listening as well as speaking; for streamlining our written documents and simplifying our spoken language".
He added: "On the flip side, I was criticized for showing self-doubt and reticence instead of conveying certainty and confidence, for straying from the message, and for too much straight talk and too little tact.
"I was both praised for speaking up and criticized for not speaking enough when the occasion demanded.
"There are many things I miss about being governor. One of them is that I can no longer move markets by my spoken word. Equally, there are many things I enjoy about not being governor. One of them is that I can speak freely without any fear of moving markets.
Subbarao said there are "powerful examples" from around
the world of how central banks have exploited the power of communication to enhance their policy effectiveness.
"Hours after the 9/11 terrorist attacks on the United States in 2001, the US central bank put out a simple statement -- The Federal Reserve System is open and operating. The discount window is open to meet liquidity needs.
"These two seemingly banal sentences, coming so soon after the attacks, had a remarkably calming effect on US-and global-financial markets. The 'announcement effect' was striking," he said.
Similarly, when the collapse of the euro seemed imminent, European Central Bank President Mario Draghi's famous words in April 2012 that the central bank would do 'whatever it takes' did more to save the euro than all the euro area leaders' exhausting summits, emergency conclaves, and emphatic communiques.
Subbarao, who was Finance Secretary before becoming RBI Governor, said the positive impact of communication is not limited to times of crisis and today's conventional wisdom is that greater transparency, active outreach, and more open communication are always good for central banks.
On steps taken by him to modernise the monetary policy, he said giving forward guidance was a big and challenging institutional innovation introduced during his time.
"At the heart of forward guidance is an indication by the central bank to shape market expectations of how it would react to evolving macroeconomic developments, allowing market participants to make necessary adjustments.
"Forward guidance on monetary policy was and is a contentious issue. At the Reserve Bank, we deliberated internally over whether to adopt the practice. We recognized that it is not a totally benign option, but decided to go ahead because we felt that the benefits outweighed the costs -- especially given continuing global uncertainty."
He noted the forward guidance is typically one short paragraph in a 6-8 page policy document, but crafting it can be a test of communication skills.
"Aware that there is a minor industry whose purpose is to parse these few sentences and probe for coded messages behind the plain English, we spent a disproportionate amount of time debating the choice of words, the turn of phrase, and the nuance," he added.
Subbarao further said RBI discovered several inherent challenges in giving forward guidance, as markets tend to ignore the caveats and interpret the guidance as an irrevocable commitment.
"As a result they find themselves on the wrong foot when things don't turn out as expected," he said, giving example of RBI policy reviews in October and December 2011, which said that "the cycle of rate increases has peaked and further actions are likely to reverse the cycle".
This generated a widely shared expectation of a rate cut at the January 2012 policy meeting, but this expectation did not materialise because inflation had not trended down as anticipated.
"Even though our inaction was consistent with the guidance, the market was unforgiving and believed we had reneged on our commitment," he added.
Subbarao further said he later realised that markets
demand not only guidance but 'guidance on guidance'.
"This can be tricky because a lot of thought goes into the wording, and attempts at further explanation risk distorting the message," he said, while recalling how he was once asked to explain the meaning of 'immediate future'.
"I replied that what we implied by 'immediate' was around three months, thereby suggesting, although not saying so explicitly, that there would be no policy rate hike at the December 2010 mid-quarter review, which was six weeks away, and that a hike would be considered only at the following quarterly policy review, three months away."
Recalling how this elaboration triggered criticism that the three-month pause implied by the guidance was too dovish, he said what you say or do not say is important, but how you say it matters even more.
Sharing another incident, Subbarao said in the midst of the so-called taper tantrum on July 15, 2013 -- when global markets reacted badly to hints from the US Federal Reserve that it might raise interest rates -- he took extraordinary step of raising rates to manage the exchange rate ahead of the regularly scheduled quarterly policy review.
About his last post-policy media conference as Governor, Subbarao said, "I had been looking forward to this conference and expecting it to be somewhat of a farewell engagement. Instead of a serious question-and-answer session on substantive issues, we would reminisce about my five years as governor. That wasn't to be.
"The first question was whether and when the monetary tightening measures instituted to manage the exchange rate would be withdrawn.
"I replied that these measures were temporary and would be rolled back once the exchange rate regained stability..."
Subbarao said his intention was to allay market fears that tight liquidity policy would choke growth, but market reacted badly to his response and the rupee fell. He was criticized for sounding apologetic about using monetary policy to defend the exchange rate.
"I realize now that I may have been guilty of miscommunication... At the same time, I was puzzled by the market reaction, because my reply was almost identical to our statement in the printed document...
"Even as I was close to finishing my job as Governor, I had not yet learned a rookie lesson in communication: markets don't take what the governor says at face value.
Having learnt to be "opportunistic" after "slipping in guidance or correcting misinterpretation in speeches or in informal interviews", Subbarao used an analyst teleconference to correct the nuance.
"The previous day, I had said that these measures will be withdrawn when the rupee became stable. Now I made a subtle change to affirm that these measures will not be withdrawn until there was firm evidence that the rupee had stabilized. Maybe that sounded alpha male enough. The market reacted positively, and the rupee swiftly reversed the losses of the previous day," he added.
Subbarao said he learnt several times over that nothing the Governor says is off the record, as he recalled his generic comments about inflation and growth debate in general at IIM Lucknow, which were taken as signals of further policy tightening and was "all over the news agency tickers before I had even finished speaking".
