Words That Send Waves to the Indian Stock Market

The pandemic and ongoing Russia–Ukraine war have severely disrupted the supply chain, resulting in inflationary scenarios and economic upheavals across the globe. With this central banks get more focused on ensuring financial and price stability by adapting tight monetary policy. It leads to capital outflow from emerging economies like India. Thus, the spurt in demand for foreign currencies weakens the Indian rupee to a remarkable low level of 80 per US dollar in the past month. In this period of high turmoil in the exchange rate market and economy in general, the Reserve Bank of India (RBI) governor’s assurance of “zero tolerance for volatile and bumpy movement” of the rupee in a speech made headlines (Nahata 2022). Such efforts from the RBI help establish its stance on the prevailing situation and sends strong signals to the market participants.

In the past two decades, central banks and academicians are trying to understand the role of these efforts in monetary policy transmission. Central banks started using effective communication to ensure accountability, display their commitment, and steer market expectations (Blinder et al 2008). The market tries to catch early signals by tracking central banks’ actions and words, as central banks are known to possess superior knowledge (Romer and Romer 2000). Such increased use of communication as a monetary policy tool by central banks makes it imperative to study its market-wide effect. This article focuses on the RBI’s communication over time and the stock market’s reaction to it.