At the August meeting of the RBI, the Indian central bank kept the repo rate, its benchmark interest rate, unchanged. Around half of economists had expected a policy rate cut (India is in a pandemic after all!). But inflation in the country has exceeded the upper-bound of the RBI’s target range, and a lot of economists correctly forecasted that the central bank would not cut.

Between speeches, statements, and economic data, there is a lot to track for the RBI. So I have produced an RBI sentiment index in an attempt to objectively quantify and automate the tracking of:

• Monetary policy statements (around 4-6 per year)
• Speeches (over 20 last year)
• CPI prints (12 per year)

Interpretation: The index is a moving average of the last 10 statements/speeches/CPI prints and can oscillate between -1 and +1. A score of +1 means that the RBI sounds optimistic about the economy and inflation is high, so one can reasonably expect the policy rate to be increased. -1 means the RBI sounds pessimistic and that inflation is low, so we can expect rate cuts.

As you can see the index has come off quite a bit since March, mostly due to pessimistic rhetoric as Covid-19 has taken a toll on India’s economy. The index would have fallen further if not for high inflation prints recently. But that is the point: the index should reflect the constraints imposed by inflation (i.e. you can be pessimistic about the economy but unable to cut due to high inflation).

An interesting overlay is between this index and bond yields. Low bond yields indicate that the market expect the central bank to cut rates, but as you can see, the RBI might be thinking differently right now. Even if you look past high inflation, some of the recent speeches and the August meeting statement show an improvement in RBI sentiment.

Details of the index:

NLP to automate scoring of rhetoric: I have used Python to automate the process of scraping all speeches and scoring them on a scale of -1 (pessimistic about the economy) to +1 (optimistic). While I was at it, I also did the same process for all RBI statements. The methodology is explained in more detail here.

Adding inflation data to the mix: I was worried that RBI speeches and statements were not adequately discussing inflationary pressure. This is particularly problematic for a country like India, which dealt with double digit inflation as recently as 2013 and where the CPI index has swung from 2.1% in January 2019 to 6.9% in July 2020. Compare that to the US, where core PCE inflation has mostly observed a humble range of 1-2%.

Everything done on Python.