Rajeswari Sengupta (IGIDR, Mumbai)

We explore how the communication strategy of the Reserve Bank of India has changed after the country officially adopted inflation targeting in 2016. Using natural language processing tools, we first provide an extensive descriptive analysis of the conduct of monetary policy in India since 1998. We then construct measures of language and structural complexity that are intuitive, straightforward, and capture well the governor-specific trends in the communication of the central bank. We find that the Reserve Bank of India’s communication is complex on average but has simplified significantly in the past 5 years. We use these measures to study the transmission of monetary policy communication to financial markets, showing that more complex statements are linked to both higher trading volumes and higher stock market volatility. In the next phase, we aim to construct simple measures to extract sentiment embedded in the statements.