ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Words That Send Waves to the Indian Stock Market

Investigating RBI’s Communication

The study draws attention to the Reserve Bank of India’s communication as a policy tool and its impact on market participants. It first aims to quantify the qualitative variable—communication by employing textual analysis methods. The investigation starts by extracting the tone of monetary policy statements and trace its transmission on market sentiment in the presence of various informational, macroeconomic, and financial controls. The work concludes that market participants draw inferences from the tone of the RBI’s monetary policy statement and update their information set about the present state and prospects. 

The pandemic and ongoing RussiaUkraine 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) governors 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 RBIs communication over time and the stock markets reaction to it.

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Published On : 20th Jan, 2024

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