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Perhaps, this may help to understand the outcomes a little better. Perhaps, it will enable a more compassionate view of the people involved in the making of monetary policy, their trials and tribulations. Monetary policy is by its nature a technical area of economic policy making. It is suffused with substantial inherent uncertainty. This uncertainty created primarily by the need for policy makers to guess the future2. Monetary policy has to be forward-looking because of the lags with which a policy rates change get transmitted across the markets and eventually gets reflected in lending rates, mortgage rates and yields. Hence monetary policy can only hope to address future inflation, not today’s inflation. It is often viewed as a specialist or niche subject, only intelligible to specialists. My own experience with soiling my hands is that all this is overstated. Undoubtedly, monetary policy makers today are treated like film stars. The public is constantly trying to second guess their likely moves. For this purpose, analysts pore over millions of data points in search of patterns of behaviour. They try to construct reduced-form explanations of monetary policy decisions – a polite expression for equations and statistical models – and attempt predictions on the basis of these regularities. In fact, the monetary policy reaction function – an equation which tries to predict the change in the policy rate if inflation deviates from the target and/or growth deviates from its trend – has spawned a cottage industry. … Monetary policy should play a passive, rule-based role and avoid unpleasant monetary surprises of trying to squeeze out a little higher growth by tolerating higher inflation. As I stated earlier, there is no point turning to economists for advice. Their answers are going to be as ambiguous as the uncertainty that characteries the conduct of monetary policy. It is said that there are two fundamental laws of economics. The first law is: for every economist, there exists an equal and opposite economist. The second law: they are both wrong. Perhaps the dual mandate of monetary policy is intended to keep this two-handed tribe busy. Even if the dual mandate is taken as fait accompli, let us evaluate its operational feasibility. At any point in time, the goal variables of inflation and growth are not visible to the monetary policy maker – inflation data are at least one month old, and those on GDP are at least three months old. Forecasts can be made in to the future, but they are based on backward looking information of one to three months ago, as I explained earlier, and they can be thrown off course by unanticipated shocks that hit them in the future. Furthermore, the goal variables are moving over time and so monetary policy maker has to take in to account not their known positions but their uncertain future trajectory. Then they have to shoot forward – getting the angle right is crucial to taking the shot. … Conclusion Monetary policy has been termed as an art, a science and a craft. Yet, at its core, it is all about informed human judgment constrained by high uncertainty, which cannot be replaced by mechanistic models or rules. Much of what goes into the monetary policy decision evolves from the deliberations that monetary policy makers have with each other, with the public and from feedback. All these processes inherently imbue the lighter side of life. A psychological explanation of this phenomenon is that monetary policy makers are trying hard to cope with the stress of a perceived threat to the economy, as I mentioned earlier. This suggests that they need to have a sense of humour in order to stay sane. An “inflation nutter” who is strongly averse to inflation might go nuts if he or she expected higher inflation but did not have a sense of humour. Also, monetary policymakers may simply have better jokes about bad outcomes than anyone else, especially inflationary outcomes. Again, humour may be a coping mechanism. In closing, I will submit that humour in monetary policy making reflects serious concerns about the economy, rather than any lack of concern or sense of complacency that Paul Krugman misreads. Thank you. 1 Speech delivered by Michael Debabrata Patra, Deputy Governor, Reserve Bank of India in the 9th SBI Banking and Economics Conclave on November 24, 2022 at Mumbai.

It is in this context that I will speak to you about monetary policy but I will situate it in the milieu of the next forty to fifty years so as to bring out some perspectives on the opportunities and challenges that will rise up to meet you as you take India towards its future. First Principles It is important to appreciate the guiding tenets that shape the design and conduct of monetary policy. First, within the arsenal of public policy instruments, monetary policy is distinguished by its rapid deployability because the situations it has to encounter warrant immediate action. Hence it is typically assigned the task of stabilisation of the economy around its productive capacity. Illustratively, when aggregate demand or total spending exceeds the country’s productive potential, imbalances develop that can easily throw the economy off course. The first signs of these imbalances are usually price pressures or inflation. Accordingly, monetary policy acts to dampen aggregate demand and bring it in alignment with productive capacity. Analogously, when demand falls below productive capacity, deflationary conditions can develop and hence monetary policy has to boost the economy to restore balance between demand and supply. Second, monetary policy has to be forward looking. … Second, monetary policy has to be forward looking. At any point in time, the information available to monetary policy authorities on the goal variables is lagged – on a measure of economic activity such as gross domestic product (GDP) for instance, information available at any point of time is typically three months old, i.e., relating to January-March in India; information on consumer prices in India is available only for May. Furthermore, policy impulses travel through the structure of the interest rates with variable and uncertain lags – changes in the policy interest rate take time to be fully reflected in lending rates charged by banks and other financial institutions. So, more often than not, monetary policy has to shoot blind. Besides, the goal variables are in motion and hence, monetary policy has to shoot forward. For this purpose, it uses all available information like a radar screen to track the formations of moving goal variables, and target them accurately. This task becomes even more complicated when dealing with their likely course into the unforeseen future such as over the next forty to fifty years. We shall get there presently. Third, as Jan Tinbergen, the 1969 Nobel Prize winner for economics showed, any policy is most efficient in achieving its goals when it follows an assignment rule - if there is one instrument such as the policy interest rate, there should be one goal. … Third, as Jan Tinbergen, the 1969 Nobel Prize winner for economics showed, any policy is most efficient in achieving its goals when it follows an assignment rule - if there is one instrument such as the policy interest rate, there should be one goal. If instead, monetary policy is overburdened with too many goals but is hamstrung with too few instruments, there is every likelihood that the instrument will end up hitting none of the goals. Fourth, monetary policy should be conducted in terms of some rule like behaviour that binds it to pursue its goals across time. Instead, if it falls prey to the temptation of exploiting short-run trade-offs – like abandoning inflation control in the short run and boosting growth or what economists call time inconsistency – it will ultimately lose sight of its objective because in the short-run pursuit of growth, inflation may be allowed to rise to levels that can be inimically harmful to growth. Fifth, modern monetary policy authorities have found that the efficacy of monetary policy is enhanced when it is supported by clear and transparent communication about the intent of policy actions and stance in the context of its goals and the manner and time frame in which they are to be achieved. Communication makes monetary policy accountable as the public is able to measure its impact.

June 06, 2018 Participants from RBI: Dr. Urjit R. Patel – Governor Mr. N. S. Vishwanathan – Deputy Governor Dr. Viral V. Acharya – Deputy Governor Mr. B. P. Kanungo – Deputy Governor Dr. M. D. Patra – Executive Director Dr. Urjit R. Patel: Good afternoon, everyone. Over the last three days the Monetary Policy Committee carefully reviewed evolving global and domestic macroeconomic developments. We noted that global economic activity and trade has continued to expand, though there has been some easing of momentum since our April meeting. Inflation pressures have emerged in some key, advanced and emerging economies; driven in part by rising commodity prices, especially those of crude oil and petroleum. Financial markets have been driven mainly by monetary policy expectations and geopolitical developments. Emerging market currencies have by and large depreciated against the US dollar. On the domestic front, GDP growth for 2017-2018 has been revised and estimated at 6.7%, backed by an all-time high production of food grains and horticulture, strengthening of industrial growth and resilient services sector activity. For 2018-19 the forecast of a normal southwest monsoon augurs well for our agriculture sector. In manufacturing, capacity utilization has increased and the manufacturing PMI remained in an expansionary mode for the tenth consecutive month in May on the back of new domestic orders and exports. In the services sector, various high frequency indicators suggest improving performance. Investment activity is expected to remain robust, even as there has been some tightening of financing conditions in recent months. … Patel: Just to make a general comment, our policy regarding liquidity is determined by anchoring the weighted average call rate to the repo rate, and we have stuck to that, both in terms of transient liquidity management and durable liquidity management, and that is what we will continue, going forward, anchoring the liquidity policy towards the weighted average call rate. Ira Dugal Bloomberg Quint: A number of emerging market central banks have responded to the volatility in the currency markets with the rate defense. What is the RBI's perspective, is that built into inflation projections? What does the RBI believe is the efficacy of the rate defense in the case of the Indian currency? Dr. Urjit R. Patel: Our monetary policy is determined by the nominal anchor that has been given to us through a legislative process and which is the consumer price index. Manojit Saha The Hindu: After the last policy, bond yields went down when the minutes of the same policy were released bond yields went up. So, why do you think the market is misinterpreting, or do you think the market is unable to interpret what the RBI is trying to say? Dr. Viral V. Acharya: I think minutes are important, so is the resolution. And in some ways if the minutes were not important, there would be no value to putting them out separately besides the resolution. … The monetary policy as I just answered is determined by our inflation targeting mandate and not by anything else. To that effect, if there are international financial or crude oil or commodity price developments, then that is internalized in the inflation forecast projection and the consequent policy choice. Thank you.

At 2.30 pm on October 4, 2017 the resolution of the Monetary Policy Committee (MPC) was released on the website of the Reserve Bank of India (RBI) and history was made in a small way. Exactly a year ago, a page was turned on a tradition that went back to the origins of the RBI in pre-independent India. The monetary policy decision, hitherto made solely by the Governor of the RBI, was ceded to a six-member committee comprising the Governor as the Chairperson, the Deputy Governor in charge of monetary policy, one officer of the RBI appointed by its Central Board, and three external members appointed by the central government. The room filled with debate and argumentation, challenge and counter-challenge, articulations of well-defended individualistic assessments, and voting – India's monetary policy was undergoing a regime change. Quietly ushered in, without any grandeur about it or anything like that, it was a big step towards the modernisation of the conduct of monetary policy in India. Invested by legislative mandate – through an amendment to the RBI Act – with the goal of 'maintaining price stability keeping in mind the objective of growth', India joined a select but growing band of countries that, beginning in 1990, adopted flexible inflation targeting (FIT) as their framework for monetary policy. Under FIT, price stability is accorded primacy as an objective of monetary policy, while being mindful of the state of the economy. … Although concerns about inflation had dominated monetary policy over the past decades in deference to a societal intolerance threshold, such an explicit commitment to a numerical inflation target as the centre-piece of policy had never been made. It was veritably a baptism by fire for the MPC, the new kid on the block in a cross-country sense of the term. The amendment to the RBI Act, the inflation target and tolerance band around it, and accountability with respect to failure to achieve the target were notified in the Gazette of India during May-August 2016. They were widely telegraphed and occupied many media bytes. What was little noticed, however, was that it was only on September 29, 2016 that a press release of the Government of India (GoI) informed the world about the appointment of the MPC. Just one working day later, the MPC plunged into its work and on October 4, it issued its first resolution, unanimously backed. Many 'firsts' surround that debut. As the statutory semi-annual Monetary Policy Report (MPR) of October 2016 noted: “For the first time in its history, the RBI has been provided the explicit legislative mandate to operate the monetary policy framework of the country. The primary objective of monetary policy has also been defined for the first time. The amendments also provide for the constitution of a monetary policy committee that shall determine the policy rate required to achieve the inflation target, another landmark in India's monetary history." … Monetary policy is ultimately the art or science of the feasible. Ben Bernanke, when he was chairman of the Federal Reserve Board, was once asked by Liaquat Ahmed, the author of the celebrated book Lords of Finance, as to how confident he was that the theory of quantitative easing or QE would work. His reply – “The problem with QE is it works in practice but it doesn't work in theory" – provoked laughter, but it is so true of monetary policy more generally. Monetary policy decision making is always complex and severely testing. It is typically undertaken in an explosion of diverse views, each differing from the other in expressing intensity and fervour. The endeavour of our MPC has been to try to share with the public through its resolutions and through individual minutes a set of balanced assessments so that monetary policy in India becomes transparent and predictable. Looking ahead, the task of the MPC is cut out and I can do no better than quote Governor Dr. Patel from his recent interview: “we should aim at achieving the inflation target without losing sight of supporting economic growth.”1 The theme of this lecture was inspired by an interview given by Governor Dr. Urjit R. Patel in the Mint, October 9, 2017 available at http://www.livemint.com/Industry/Gr9H0MnqAL5Ko4PdGa7fdL/RBI-governor-Urjit-Patel-Weve-started-seeing-the-upturn-in.html.I am grateful to Dr. Viral V. Acharya for valuable comments. Inputs from Shri Sitikantha Pattanaik, Dr. Praggya Das, Dr. Rajiv Ranjan, Dr.

.tablecontent1 { PADDING-RIGHT: 5px; PADDING-LEFT: 5px; FONT-WEIGHT: normal; FONT-SIZE: 13px; PADDING-BOTTOM: 3px; COLOR: #000000; PADDING-TOP: 3px; FONT-FAMILY: Arial, Helvetica, sans-serif; HEIGHT: 22px; BACKGROUND-COLOR: #f2f8fd; border-color:#3e72aa; } .td{font-family:Arial; color:#000000; text-align:justify; font-size:13px;} Key to the efficient conduct of monetary policy is the condition that it must exert a systematic influence on the economy in a forward-looking sense. A priori economic theory backed by some empirical evidence has identified the main channels through which monetary policy impacts its final targets, viz., output, employment and inflation. Broadly, the vehicles of monetary transmission can be classified into financial market prices (e.g., interest rates, exchange rates, yields, asset prices, equity prices) or financial market quantities (money supply, credit aggregates, supply of government bonds and foreign denominated assets). It is recognized that, whereas these channels are not mutually exclusive, the relative importance of each channel may differ from one economy to another depending on a number of factors including the underlying structural characteristics, state of development of financial markets, the instruments available to monetary policy, the fiscal stance and the degree of openness.   Traditionally, four key channels of monetary policy transmission are identified, viz., interest rate, credit aggregates, asset prices and exchange rate channels. The interest rate channel emerges as the dominant transmission mechanism of monetary policy. … The choice of policy framework in any economy is always a difficult one and depends on the stage of macro-economic and financial sector development and is somewhat of an evolutionary process (Mohan, 2006a). In a market-oriented financial system, central banks typically use instruments that are directly under their control: required reserve ratios, interest charged on borrowed reserves (discount window) provided directly or through rediscounting of financial assets held by depository institutions, open market operations (OMOs) and selective credit controls. These instruments are usually directed at attaining a prescribed value of the operating target, typically bank reserves and/ or a very short-term interest rate (usually the overnight interbank rate). The optimal choice between price and quantity targets would depend on the sources of disturbances in the goods and money markets (Poole, 1970). If money demand is viewed as highly unstable, greater output stability can be attained by stabilizing interest rates. If, however, the main source of short-run instability arises from aggregate spending or unsterilized capital inflows, a policy that stabilizes monetary aggregates could be desirable. In reality, it often becomes difficult to trace out the sources of instability. Instead, monetary policy is implemented by fixing, at least over the short time horizon, the value of an operating target or policy instrument. … Instead, monetary policy is implemented by fixing, at least over the short time horizon, the value of an operating target or policy instrument. As additional information about the economy is obtained, the appropriate level at which to fix the policy instrument/ target changes.             The operating procedures of monetary policy of most central banks have largely converged to one of the following three variants: (i) a number of central banks, including the US Federal Reserve, estimate the demand for bank reserves and then carry out open market operations to target short-term interest rates; (ii) another set of central banks, of which the Bank of Japan used to be a part until recently, estimate market liquidity and carry out open market operations to target bank reserves, while allowing interest rates to adjust; and (iii) a growing number of central banks, including the European Central Bank and the Bank of England, modulate monetary conditions in terms of both quantum and price of liquidity, through a mix of OMOs, standing facilities and minimum reserve requirement and changes in the policy rate. The operating procedure, followed in India, however, presents a fourth variant.  III.1 Money Markets and the Liquidity Adjustment Facility In the Indian context, reforms in the monetary policy operating framework, which were initiated in the late 1980s crystallised into the Liquidity Adjustment Facility (LAF) in 2000 (Annex VI).

I think the problem is that in the models of the world which we are working with, we have only a fairly crude understanding of the behavior of financial institutions as they extend credit and the behavior of all the risk takers, so to speak in the financial sector. My guess is that in all our models be the econometric models, or the ones we are carrying around in our heads, we have only very limited assessment or capture of those dynamics and I think that is important because if it is true as a number of people today claim that the setting of monetary policy influences the risk taking behavior of all these entities in the financial sector. Then I think it is quite hard for monetary policy to escape completely the charge that it may have however inadvertently done something to foster the build up of excessive leverage and risk. And I think what we need to be doing is working harder on capturing those dynamics in the way we think about the world and I think down that track was the scope to duly take account of financial stability concerns in the setting of monetary policies. … I characterize it as a modest vision of monetary policy, which would be that essentially monetary policy can do one thing, which is maintain price stability, however, defined and that leads to good things like macro and financial stability. Now, Governor Subbarao has articulated a very different view that price stability may not necessarily be consistent with either of those and in fact once in a while could be in conflict with those, but then the question arises what is the right framework to do monetary policy in and this what I would characterize as the policy where essentially one wants to do a lot and it is omnipotent so much by choices, by compulsion. That forces you into this set up where essentially you are not working within a framework and I think this was what would make people like Lars and Bill Poole somewhat concerned that essentially there is an attempt to deal with a lot. They would probably agree it need to be dealt with, but without a clear framework in mind. So the question I would like to pose to this panel is essentially if you are in an environment where you have to deal with you should know the monetary policies are not often dealing with deficiencies in the international financial system, dealing with supply shocks, dealing with counteracting defects of physical dominance and so on and you know you have to do it. … So the question I would like to pose to this panel is essentially if you are in an environment where you have to deal with you should know the monetary policies are not often dealing with deficiencies in the international financial system, dealing with supply shocks, dealing with counteracting defects of physical dominance and so on and you know you have to do it. It is the right approach still to essentially take the inflation targeting of some framework related to that improve it, in other words do we just need better models that take into account things you should care about or do we need to move to something completely different where essentially the old vision of monetary policy is being limited in its objectives and what it can achieve has to be thrown away and you have to become omnipotent central bankers. [Martin Wolf]: I think we are getting additional panelists, but a very important point. I will take one more, I think I do not know the gentleman at the back, yes please you, you got the microphone, yes, yes, go ahead. [Sabapathy]: Thank you sir, I am Sabapathy from EPW Research Foundation. Taking cue from what Bangladesh Governor said, if we encourage regional monetary arrangements it need not necessarily be treated as an alternative to the international monetary fund.

The Role of Monetary Policy It will be remiss of me not to speak about the role of monetary policy in the context of geopolitical spillovers. As a backdrop, it is perhaps useful to summarise the monetary policy actions and stance adopted in 2022-23 so far. Starting in April and up to June, monetary policy has effectively tightened by 130 basis points, which is fully reflected in the movement of the overnight weighted average call money rate, the operating target of monetary policy. The stance of monetary policy has shifted from being ‘accommodative as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward’ to ‘withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.’ With headline inflation having moved up by 80 bps in April but reverting by almost the same magnitude in May, the RBI has surged ahead of the curve. In fact, the question that the now blind-sided are asking is: with prices of food and fuel driving up inflation everywhere and in India as well, how will increases in the policy rate help? This issue has been addressed in some detail in the State of the Economy article, but I will draw out the essence of its argumentation. … Therefore, it is indeed appropriate that monetary policy is accountable, without any escape clauses. In India, this accountability is provided for with sufficient flexibility in the form of an inflation target defined in averages rather than as a point; achievement of the target over a period of time rather than continuously; a reasonably wide tolerance band around the target to accommodate measurement issues, forecast errors and supply shocks; and failure being defined as three consecutive quarters of deviation of inflation from the tolerance band, rather than every deviation from the target. Let me now turn to the specific aspects of the accountability conditions. Research within the RBI, published in the Report on Currency and Finance 2020-21, and outside it clearly demonstrates that growth is unambiguously impaired when inflation crosses 6 per cent. Hence, breaching of the appropriate upper tolerance limit of 6 per cent for India’s inflation target should trigger accountability if monetary policy has to remain credible. Currently, we live in extraordinary times. With inflation at multi-decadal highs across advanced and emerging and developing economies, the inflation crisis is global. Actually, it is just the face of one of the most se-vere food and en­ergy crises in re­cent his­tory that now threat­ens the most vulnerable across the globe. In response, the most widespread monetary policy tightening in decades is underway. … In response, the most widespread monetary policy tightening in decades is underway. It is the most coordinated tightening cycle in many years, and the actions are appearing synchronised because imported inflation pressures are being exacerbated by country-specific factors acting at the same time. India is being impacted by the global inflation crisis, reflecting the materialising of geopolitical risks. Although it is largely driven by food and fuel supply disruptions and bottlenecks, mending supply always takes time. Several steps have been taken, demonstrating that price stability is a shared responsibility between the government and the central bank, but these measures will inevitably have gestations: they will show results only over a period. To gain time for supply to respond, monetary policy has to be deployed, but it is not likely to be painless. As I stated in my minutes in the June 2022 MPC meeting, the accountability mechanism enhances credibility in the monetary policy framework, especially in its commitment to re-align inflation with its target in the event of prolonged divergences and that is of paramount importance. The wide public sensitivity to accountability works in the same direction as monetary policy in the pursuit of ensuring price stability. It shows that inflation expectations are anchored around the conviction that monetary policy will not tolerate persistent deviations from the target because it is enjoined by legislation (not) to do so. One final question on accountability engages public attention: what is the role of the MPC here?

In view of growing volume of retail credit, the interest rate channel of monetary policy is likely to have a greater influence on private consumption and economic activity in the country.            While credit flows to agriculture and the SME sector have increased in recent years, the need is to further increase the flow of credit to these sectors. To facilitate increased access to formal channels of credit and to enable the credit market to play an important role to sustain the growth process, several issues need to be addressed. The Self-Help Group-Bank linkage programme, which has become quite popular in recent years, is expected to gain further ground with the NABARD taking up a programme for intensification of these activities in 13 identified states. Although micro-finance activities should be commercially viable, it is reported that some micro-finance institutions (MFIs) are charging very high interest rates, which could prove to be counter-productive in the long run. While informality of micro-finance structure is important, NABARD and banks need to build appropriate indigenous/local safeguards against such practices and in their relationship with MFIs.           An important issue facing the SME sector is that it is perceived as more risky and hence banks charge relatively high rate of interest and insist on collateral. … There has been close co-ordination between the Reserve Bank and the Government, as also with other regulators, which helped in orderly and smooth development of the financial markets in India.            Initiatives taken by the Reserve Bank and other regulatory authorities have brought about a significant transformation in the working of the various segments of the financial market. Domestic financial markets have transited from a highly administered system – marked by administered interest rates, credit controls, and exchange control – to a system dominated by market-determined interest rates and exchange rate and price based instruments of monetary policy. These developments, by improving the depth and liquidity in the domestic financial markets, have contributed to better price discovery of interest rates and exchange rates. Markets have grown in size and depth over the years, paving the way for flexible use of indirect instruments. Greater depth and liquidity and freedom to market participants have also increased the integration amongst the various segments of the financial market. Increased integration not only leads to more efficient dispersal of risks across the spectrum but also increases the efficacy of monetary policy impulses. In a world of integrated financial markets, monetary policy operates not only through the conventional interest rate channel but also through the exchange rate and other asset price channels of monetary transmission, thereby strengthening the impact of monetary policy on the real economy and inflation. … In a world of integrated financial markets, monetary policy operates not only through the conventional interest rate channel but also through the exchange rate and other asset price channels of monetary transmission, thereby strengthening the impact of monetary policy on the real economy and inflation. Concomitantly, with growing liberalisation, deregulation and integration with global financial markets, policy initiatives have ensured that domestic financial markets and market participants are in a position to absorb unanticipated and large shocks that can emanate from global developments so that financial stability is maintained in the country while supporting the growth. The Indian experience demonstrates that the development of markets is an arduous and time-consuming task that requires conscious policy actions and effective implementation. Alpana Killawala Chief General Manager Press Release : 2006-2007/1642

Monetary Policy for 1997-98 The monetary and credit policy for 1997-98, announced in April 1997, seeks to achieve the twin objectives of inflation control and promotion of growth. In pursuing these objectives, the accent has been placed on creating an environment that leads to augmentation of credit flow to the real sector for supporting the expected buoyancy in economic activity, consolidating and making further progress in the financial sector reform and maintaining a strong vigil on the price front. Broadly speaking there are four major areas which have been given focussed attention in the current monetary and credit policy. The first relates to maintaining a reasonable degree of price stability in the economy by regulating the money supply towards moderating the inflationary pressure.Based on the assumption of a real GDP growth of 6 to 7 per cent, the money supply growth has been targeted in the range of 15 to 15.5 per cent, for restricting the inflation rate to below 6 per cent during 1997-98. Such an inflation target should be viewed as reasonable for dampening the long-term inflation expectation in the economy, for reducing the impact of inflation related uncertainty on output, and for maintaining the external competitiveness of the economy. The second important objective addressed by the monetary policy relates to improving the credit situation and bringing about a reduction in the interest rates. … The second important objective addressed by the monetary policy relates to improving the credit situation and bringing about a reduction in the interest rates. While the full impact of the 4 percentage point reduction in CRR effected in the last financial year will be seen in the current year, a number of measures have been announced to further improve the lendable resources of the banks. Introduction of a general refinance facility for banks equivalent to 1.0 per cent of the fortnightly average outstanding aggregate deposits during 1996-97 and exemption of inter-bank liabilities from maintenance of Cash Reserve Ratio of 10 per cent are the two important measures in this direction. These measures will augment the banking sector's liquidity to the extent of Rs.5,550 crore. Apart from its liquidity impact, the exemption of inter-bank liabilities from maintenance of CRR will help promote the term money market and facilitate the development of a realistic rupee yield curve. An important step in the direction of improving the monetary management has been the operationalisation of the Bank Rate as an instrument to transmit signals of monetary policy and as a reference rate for influencing the direction of interest rate movement in the economy. Keeping this in view while the Bank Rate has been reduced from12 per cent to 11 per cent, its linkage with the short-term deposit rate of banks has ensured one percentage point reduction in the interest rate on deposits of 30 days to one year maturity. … The basic objectives of these measures are to widen and deepen the foreign exchange markets and integrate them with the other markets, so that a unified financial system would lead to the achievement of higher level of efficiency in resource allocation in the economy. Integration of various segments of financial markets has also become an absolute necessity for improving the transmission channel of monetary policy and achieving a greater degree of openness in the economy. The monetary policy for 1997-98 has therefore, adopted a package approach to improving the functioning of the financial system, to augmenting the flow of credit from the banking system to various segments of the economy, and to keeping the inflationary pressure under control. During the period March 28 to July 4, 1997, non-food credit by scheduled commercial banks declined by Rs.2,242 crore as against a decline of Rs.2,753 crore during the corresponding period in the previous year. However, banks investment in commercial paper, PSU bonds and shares and debentures of the private sector increased by Rs.2,169 crore as against an increase of Rs.1,108 crore last year. Thus, looking at the total flow of funds from scheduled commercial banks to commercial sector, it will be seen that there has been a turn-around of Rs.1,700 crore in the current year as compared with the previous year.

Objectives of Monetary Policy Monetary policy is an arm of public policy. It, thus, has set objectives and priorities, which are derived from the respective mandates of central banks. It ranges from a single objective of price stability, considered to be the dominant objective of monetary policy, to multiple objectives that also include growth and financial stability. In the Indian context, the preamble to the Reserve Bank of India Act, 1934 delineates the basic functions of the Reserve Bank as, “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” The objectives of monetary policy evolved from this broad guideline as maintaining of price stability and ensuring adequate flow of credit to the productive sectors of the economy. Monetary stability cannot be ensured without safeguarding the purchasing power of the currency. Similarly, the credit system helps foster growth which could reinforce monetary stability. Hence, stabilisation of inflation at a low level and stabilisation of output around its potential level remain the quintessential objectives of monetary policy in most countries. In practice, monetary policy in India endeavoured to maintain a judicious balance between economic growth and price stability. Price stability does not necessarily mean a constant price level, but a low and stable inflation. … Monetary policy Framework Achieving the monetary policy objectives requires articulation of a consistent monetary policy framework. This becomes necessary as central banks strive to achieve these objectives only indirectly through instruments which are under their direct control. For instance, under the monetary targeting framework, central banks, through the instruments under their direct control such as cash reserve ratio (CRR), tried to influence an intermediate target such as money supply which had a stable relationship with the final objectives of price and output. Monetary policy framework, however, has been a continuously evolving process contingent upon the level of development of financial markets and institutions as also the degree of global integration. In India as in other countries, monetary policy framework has undergone significant transformation over time. India followed a monetary targeting framework with feedback during the mid-1980s to 1997-98 under which broad money was used as an intermediate target for monetary policy. This framework was, however, rendered increasingly inadequate by the mid-1990s due to several developments that took place with economic and financial sector reforms. First, on account of measures undertaken during the 1990s to develop the various segments of the financial market, there was discernible deepening of the financial sector (Chart 1). This significantly improved the effectiveness in the transmission of policy signals through indirect instruments such as interest rates. Second, with the opening up of Indian economy, increase in liquidity emanating from capital inflows raised the ratio of net foreign assets to reserve money. … In this context, Cecchetti (2011) cautions that central bank operating procedures in the future are likely to be more complicated with more tools and more options.4 Monetary and fiscal coordination, therefore, assumes further importance in the implementation of monetary policy. Conclusion Major crises do influence monetary policy formulation as they question the adequacy of the extant practices and belief. In this regard, the issues that I have mentioned are already being widely debated, though a consensus eludes. But one thing is clear: central banks will have to increasingly grapple with the challenge of a broader set of objectives without diluting the objective of price stability. Monetary policy formulation is an ever evolving process both in response to and as a consequence of changes in the financial markets and the real economy. This is a phenomenon we have observed in India in our monetary policy formulation over the years. In the process, monetary policy in India has become increasingly transparent with greater involvement of all the stakeholders for better policy outcome. * Speech by Shri Deepak Mohanty, Executive Director, Reserve Bank of India, delivered at the Royal Monetary Authority of Bhutan, Thimphu on 1st December 2011. The assistance provided by J.K. Khundrakpam and Rajeev Jain is acknowledged. 1 Schmitt-Grohe, Stephanie and Martin Uribe (2011), “The Optimal Rate of Inflation” in Handbook of Monetary Economics, Friedman, B. and Woodford, M. , (eds.). 2 Mohanty et al.

Medium term flexible inflation targetting means that the monetary policy committee focusses on inflation over the medium term, being concerned about too high, as well as too low, inflation. That means it may be willing to overlook temporary inflation spikes (such as, this November’s inflation numbers) but also raise rates when sustained low interest rates and low inflation increase threats to financial stability – because a financial crisis could lead to deflation. In other words, the monetary policy committee will not put on blinkers and see just the inflation number. A number of emerging markets have adopted some form of targetting, while “non-targetters” like the Fed target inflation in all but name, including putting a numerical target to its goal of price stability. In the remaining time, I want to present one more issue that has many commentators exercised – they say the real problem is food inflation, how do you expect to bring it down through the policy rate? The simple answer to such critics is that core CPI inflation, which excludes food and energy, has also been very high, reflecting the high inflation in services. Bringing that down is centrally within the RBI’s ambit. But I will argue that policy is not irrelevant even in controlling food inflation, though clearly, the government also has an important role to play. 1. … Indeed, with the slowdown in the in the urban economy, there is some evidence now that rural wage growth is slowing (Chart 13), though a recent pick up is of concern. Finally, our food prices have largely caught up with global prices(we were the world’s largest rice exporter last year). Given that global food prices have been moderating, such moderation should feed through to domestic food prices – provided we do not intervene to prevent the feed-through of global prices, and do not intervene in limiting exports or imports. Let me emphasise that the RBI welcomes rural prosperity and wants to help increase rural productivity through appropriate credit and investment. But recent inflation has not helped strengthen the hand of the farmer, so the fight against inflation is also in the farmer’s interest. To sum up, As prosperity has increased the demand for food, we have needed more food production (or imports). Higher agricultural commodity prices should have incentivized farmers to produce significantly more. They have, but not enough. Part of the reason may be that farmer earnings are being eaten away by higher costs, most important of which is wages. To limit the rise in rural wages, given that it has to rise relative to other wages to attract labour into agriculture, wages elsewhere should not rise as much. Monetary policy is an appropriate tool with which to limit the rise in wages, especially urban ones. … Monetary policy is an appropriate tool with which to limit the rise in wages, especially urban ones. The slowdown in rural wage growth may be partly the consequence of tighter policy limiting wage rise elsewhere. Of course, monetary policy’s effectiveness in containing other price and wage increases (such as, services prices, which are an important part of the CPI index)) is far less controversial. To conclude, the RBI believes its fight against inflation will have traction, despite food being an important component of the CPI.

The role of monetary policy is to continue to maintain stability and so contribute to growth on an enduring basis. It is in the context of sensitising the public to the dilemmas and trade-offs involved in managing this change that the Mid Term Review of October, 2006 explained the concept of overheating i.e., a situation in which current output is running above potential output. In the current environment, and in the presence of structural change, the task of identifying overheating becomes difficult for the monetary authority. For the conduct of monetary policy, however, it is crucial to monitor all available information for signs of overheating with a view to keeping inflation expectations stable and ensuring that the gains from high growth are consolidated. Accordingly, sensing how close is the economy to its potential growth is the vital judgment that has to be made to set the timing and direction of monetary policy. What is potential growth is thus the question that holds the key. There is general agreement among policy makers that the level and pace of potential growth is becoming increasingly difficult to diagnose. Open trade has expanded the supply potential of several economies. Moreover, for a country undergoing structural transformation with large unemployment/under employment of resources, the concept of potential growth becomes even more fuzzy. For instance, the Economist (February 3, 2007) observes: "India is undergoing a paradigm shift and so backward-looking historical data are now irrelevant for assessing future growth". … IV. The Monetary Policy Response It is well known that monetary policy operates cumulatively and with lags that can range between 12 to 18 months, depending on the specifics of the economy. It is in this context that beginning in mid 2003, the Reserve Bank started a graduated withdrawal of accommodation. Since September, 2004 repo/reverse repo rates have been increased by 125/150 basis points, the CRR has been raised by 100 basis points, risk weights have been raised in the case of housing loans (from 50 per cent to 75 per cent), commercial real estate (from 100 per cent to 150 per cent) and consumer credit (from 100 per cent to 125 per cent) and general provisioning requirement for standard advances in specific sectors has been raised to 1.0 per cent of standard advances. At the time of the Third Quarter Review, the combination of macroeconomic developments embodied in high growth and firming inflation, escalating asset prices and the enduring strength of capital flows, a three-pronged approach was envisaged. A measured increase in policy interest rates to assuage demand pressures was considered necessary in conjunction with some modulation of capital flows and the need to fortify banks’ balance sheets by precautionary provisioning and a greater sensitivity to underlying risks. Accordingly, in the Third Quarter Review, it was decided to increase the fixed repo rate under the liquidity adjustment facility (LAF) of the Reserve Bank by 25 basis points to 7.50 per cent. … The stance of monetary policy was set out as: • To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum. • To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion. • To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum. It is important to note that monetary policy authorities all over the world over are expressing similar sentiments in terms of an uncertain outlook, concerns about persistent underlying inflation and some nervousness about visitations of financial volatility. Accordingly, several central banks have shown a readiness to respond asymmetrically to any signs of price and financial instability. The ECB, the Bank of England, the Reserve Bank of Australia, the People’s Bank of China and the Bank of Korea raised policy rates. In order to contain financial market volatility arising from large liquidity flows, several central banks have tended to tighten monetary policy, even at relatively low current inflation rates, as in Thailand, Turkey, Saudi Arabia and Iceland.

In reality, monetary policy strategy of a central bank depends on a number of factors that are unique to the country and the context. Given the policy objective, any good strategy depends on the macroeconomic and the institutional structure of the economy. An important factor in this context is the degree of openness of the economy. The more open an economy is, the more the external sector plays a dominant role in monetary management. The second factor that plays a major role is the stage of development of markets and institutions: with technological development as an essential ingredient. In a developed economy, the markets are integrated and policy actions are quickly transmitted from one sector to another. In such a situation, perhaps it is possible for the central bank to signal its intention with one single instrument. Operating ProceduresOperating procedures refer to the choice of the operational target, the nature, extent and the frequency of different money market operations, the use and width of a corridor for market interest rates and the manner of signaling policy intentions. The choice of the operating target is crucial as this variable is at the beginning of the monetary transmission process. The operating target of a central bank could be bank reserves, base money or a benchmark interest rate. While actions of a central bank could influence all these variables, it should be evident that the final outcome is determined by the combined actions of the market forces and the central bank. … In an increasingly synchronised business cycle environment, international policy coordination becomes extremely important.Twelfth, internationally, there has been more awareness that policy effectiveness is constrained by uncertainty. In fact, in many countries, the central bank projections are now published in the form of a fan chart rather than point estimates.Monetary Policy in IndiaPolicy Making Process Traditionally, the process of monetary policy in India had been largely internal with only the end product of actions being made public. A process of openness was initiated by Governor Rangarajan and has been widened, deepened and intensified by Governor Jalan. The process has become relatively more articulate, consultative and participative with external orientation, while the internal work processes have also been re-engineered to focus on technical analysis, coordination, horizontal management, rapid responses and being market savvy.The stance of monetary policy and the rationale are communicated to the public in a variety of ways, the most important being the annual monetary policy statement of Governor Jalan in April and the mid-term review in October. The statements have become over time more analytical, at times introspective and a lot more elaborate. Further, the statements include not only monetary policy stance or measures but also institutional and structural aspects. The monetary measures are undertaken as and when the circumstances warrant, but the rationale for such measures is given in the Press Release and also statements made by Governor and Deputy Governors unless a deliberate decision is taken not to do so on a contemporaneous basis. … This provides a basis for further research work in the academic community also. These are some illustrative items of significance for further research in the realm of monetary policy.Concluding RemarksIn this lecture, I have attempted to focus on the conduct of monetary policy and highlighted some of the immediate tasks. In case, there is interest in an overview of theory and analytics, especially in the context of role of monetary policy in revitalizing growth in India, I would urge you to refer to the Report on Currency and Finance 2000-01, released yesterday. The challenges ahead are aptly summarized in the concluding paragraph of the chapter on Growth, Inflation and the Conduct of Monetary Policy of the Report, which states "The conduct of monetary policy in India would continue to involve the constant rebalancing of objectives in terms of the relative importance assigned, the selection of instruments and operating frameworks, and a search for an improved understanding of the working of the economy and the channels through which monetary policy operates".* Invited Lecture by Dr.Y.V.Reddy, Deputy Governor, Reserve Bank of India, at the 88th Annual Conference of The Indian Econometric Society at Madras School of Economics, Chennai on January 15, 2002. He is grateful to Dr.D.V.S.Sastry, Shri.Deepak Mohanty, Shri.Indranil Bhattacharyya and Shri.Kaushik Bhattacharya for their assistance.

3.1 The framework of monetary policy has undergone far-reaching changes all over the world in the 1990s, mainly in response to the challenges and opportunities of financial liberalisation. There is, first of all, a clearer focus on price stability as a principal - though not necessarily the sole - objective of monetary policy. Besides, with the deregulation of financial markets and globalisation, the process of monetary policy formulation has acquired a much greater market orientation than ever before, inducing a shift from direct to indirect instruments of monetary control. This has been accompanied by several institutional changes in the monetary-fiscal interface to ensure that central banks possess the autonomy to anchor inflation expectations. 3.2 Monetary management is now further complicated by the increasing trade and financial openness. The opening up of the capital account, while necessary for efficiency of capital, exposes the economy to sudden switches in capital flows. This, in turn, can lead to large changes in exchange rates over short periods of time, not necessarily related to fundamentals. Volatility in capital flows and exchange rate impacts not only domestic demand and inflation, but also has implications for the maintenance of financial stability. Central banks are thus concerned not

In a way, the context in which monetary policy is set leads to a confrontation with the impossible trinity – independent monetary policy, open capital account and managed exchange rate. The theory holds that at best, only two out of the three would be feasible. In practice, however, there is a shift in preference away from the corner solution with respect to financial imbalances. Currently, intermediate solutions, which were earlier regarded as ‘fuzzy’, are now becoming increasingly relevant. Moreover, in recognition of the differences between trade and financial integration – first pointed out by Jagdish Bhagwati – there is less certainty today about the corner solutions than in the past. Thirdly, at a practical level, the recent experience seems to indicate that globalisation may have had accentuated potential conflicts that can impact the fabric of our societies. Outsourcing to low-wage countries to derive benefits of lower cost, has generated restiveness in the labour markets of the advanced countries, particularly in the skilled segment of tradable services that are more exposed to foreign competition. The geographical fragmentation of production base has increasingly been used by big firms as a bargaining tool with workers. Increased emigration from the developing and emerging countries has depressed wages in the advanced economies and heightened social tensions. In recent years, the contractionary effects of cooling of the housing markets may also be building up further pressure against globalisation. … The conduct of monetary policy inevitably involves a careful judgment on the relative weights assigned to the domestic and the global factors and constant reassessment of these in response to evolving circumstances. In a dynamic setting, when the financial markets are continually evolving, and payment systems and technology are changing rapidly, one may not find a clear-cut evidence of stability in monetary rules and intermediate targeting. In such circumstances, monetary authorities are being constrained to look at all relevant indicators, following a menu or a ‘check list’ approach. Discerning news from noise is a persistent dilemma for conducting monetary policy. Since external capital flows to emerging economies cannot be easily predicted and can also reverse even in the presence of sound fundamentals, monetary authorities have to make choices in regard to exchange rate and monetary management, very often. The appropriate management of monetary policy may require the monetary authorities to consider offsetting the impact of foreign exchange market operations, partly or wholly, so as to retain the intent of monetary policy. The monetary authority has to decide on the extent of off-set as also the means of off-set – market based or non-market based or a combination of the two. Financial stability considerations may require the use of interest rate tool, in conjunction with other prudential measures. … In the face of the consequent build-up of liquidity, elevated asset prices and soaring consumer indebtedness, is there a dark side to the future? The intellectual edifice on which monetary policy is founded is rooted in the management of aggregate demand. But a supply shock arising from globalisation can produce vastly different growth-inflation outcomes, which monetary policy by itself is not fully equipped to manage. Indeed, a question that has been asked in this context is whether price stability is enough as a goal of monetary policy and how sacrosanct it is when, for instance, central banks have to contend with financial imbalances even if it means an overshooting of inflation targets. In a FICCI-IBA Conference, it will be remiss of me not to address the relationship between the real and the financial sectors in India in the context of globalisation. Economists have for long recognised the strong complementarities between the real and the financial sectors. Financial development contributes to growth in either a supply-leading or a demand-following sequence; that is, either the financial sector development creates the conditions for growth or the growth generates demand for the financial services. It is important to recognise that the financial sector in India is no longer a constraint on growth and its strength and resilience are acknowledged, though improvements need to take place.

7.1 Monetary policy affects its final goals – prices and output – with long lags. Policies responding only to the current state of the economy may be destabilising and monetary authorities are, therefore, required to be forward-looking in their approach. A forward-looking approach would, however, be contingent upon a broad understanding of the monetary transmission mechanism - the process through which changes in monetary policy instruments affect output and inflation. Moreover, the transmission lags are not only long but often also found to be variable. The variability of the lags has been accentuated by the ongoing financial deregulation, liberalisation and innovations in a large number of economies. 7.2 Reflecting the process of financial liberalisation, there have been changes in operating procedures of monetary policy. Notably, monetary aggregates have been de-emphasised as an intermediate target of monetary policy and, for an increasingly large number of economies, short-term interest rates have emerged as the operating target of monetary policy. In this context, the speed and size of pass-through from policy rates to market rates become critical. Concomitantly, concepts such as neutral real rate have been an issue of debate. 7.3 Like other Emerging Market Economies (EMEs), mon

7.1 Monetary policy affects its final goals – prices and output – with long lags. Policies responding only to the current state of the economy may be destabilising and monetary authorities are, therefore, required to be forward-looking in their approach. A forward-looking approach would, however, be contingent upon a broad understanding of the monetary transmission mechanism - the process through which changes in monetary policy instruments affect output and inflation. Moreover, the transmission lags are not only long but often also found to be variable. The variability of the lags has been accentuated by the ongoing financial deregulation, liberalisation and innovations in a large number of economies. 7.2 Reflecting the process of financial liberalisation, there have been changes in operating procedures of monetary policy. Notably, monetary aggregates have been de-emphasised as an intermediate target of monetary policy and, for an increasingly large number of economies, short-term interest rates have emerged as the operating target of monetary policy. In this context, the speed and size of pass-through from policy rates to market rates become critical. Concomitantly, concepts such as neutral real rate have been an issue of debate. 7.3 Like other Emerging Market Economies (EMEs), mon

Fiscal policy and monetary policy are essentially two arms of overall economic management. Both have common objectives i.e., the stabilisation of output and prices and both belong in the genre of policy instruments that operate on aggregate demand, adjusting/smoothing it so as to ensure an economy-wide correspondence with the evolution of aggregate supply, though elements of fiscal policy, particularly in the levy of indirect taxes, can also have sectoral components. Thus, it is critical for the formulation and implementation of monetary and fiscal policies to be interactive and complementary so as to maximise public policy's contribution to enhancing social welfare. In essence, this is the philosophical rationale driving the reforms of monetary and fiscal policies in India since the 1990s. Accordingly, even as monetary policy provided stable monetary and financial conditions, which aided the fiscal reform process, it has had to undergo significant change in formulation and conduct in order to cope with the changing contours of fiscal policy and the new dynamics of monetary-fiscal coordination. Monetary Policy since the 1990s The simultaneous institution of macroeconomic stabilisation and structural reforms in response to the fiscal/balance of payments crisis in 1990-91 brought in fundamental changes in the conduct of monetary policy in India in terms of a clearer recognition of the hierarchy of objectives, adjustments in the operating framework, choice of instruments, and institutional deepening. … Monetary Policy since the 1990s The simultaneous institution of macroeconomic stabilisation and structural reforms in response to the fiscal/balance of payments crisis in 1990-91 brought in fundamental changes in the conduct of monetary policy in India in terms of a clearer recognition of the hierarchy of objectives, adjustments in the operating framework, choice of instruments, and institutional deepening. During the difficult years of transition in the early 1990s, monetary policy performed the role of nominal anchor for an economy undergoing a deep-seated structural transformation. Tight monetary control set the stage for fiscal stabilisation and consolidation and a wide range of reforms encompassing the real, financial and external sectors of the economy.  In addition, the setting of monetary policy had to adapt to the new challenges being thrown up by the reform process. First, the diffusion of financial sector reforms was altering the processes of financial intermediation and the channels of policy transmission.  Second, progressive international integration of the economy as a part of reforms was increasingly subjecting the conduct of monetary policy to exogenous influences from the external environment.  Objectives The case for price stability as the dominant objective of monetary policy began to assume importance in the early 1990s (RBI, 2004). … A credible approach to evaluating the efficiency of monetary policy is perhaps to focus on actual outcomes. Purely for the purpose of analysis, this assessment can be classified as under: (i) operating condition indicators; (ii) intermediate indicators; and (iii) ultimate goals Operating Conditions Indicators         The key objective underlying the operating framework of monetary policy in India is to ensure stable conditions in financial markets by moderating volatility through a flexible use of policy instruments but without a specific view on the level of financial prices.  In the money market, the Reserve Bank’s operations are conducted with a view to allowing the overnight interest rates to evolve in a stable manner within an informal corridor set by the LAF so that policy changes in quantities and rates are transmitted to other interest rates in an efficient manner.  India’s exchange rate policy is one of managed flexibility without any target or band but with interventions by the Reserve Bank to ensure orderly conditions in the foreign exchange market.  In the Government securities market, the objective has been to develop depth and liquidity and a smooth sovereign yield curve that could serve as a benchmark for pricing of other financial instruments.

I.1 The conduct of monetary policy has undergone fundamental changes and regime shifts all over the world, mainly in response to the challenges and opportunities thrown up by structural changes in economic activity as well as by financial liberalisation and its outcomes. A clearer focus on price stability as a principal − though not necessarily the sole − objective of monetary policy has evolved through a broad consensus. With the deregulation of financial markets and globalisation, the process of monetary policy formulation has acquired a much greater market orientation than ever before. This has been accompanied by institutional changes even as central banks have strived for operational autonomy in pursuit of their goals. I.2 The global financial crisis and its aftermath have posed formidable challenges for central banks and subjected their mandates to close scrutiny and re-evaluation in the face of unprecedented financial instability. In advanced economies (AEs), this has necessitated use of unconventional monetary policy tools including asset purchases and forward guidance. In the case of emerging market economies (EMEs), the conduct of monetary policy has been complicated by, inter alia, systemic externalities associated with monetary policies of a

The positive contributions of monetary policy were made possible by reviewing and continuously refining the monetary policy framework, in tune with changing economic environment and context. In this address, I would like to take you through various aspects of our experience in the conduct of monetary policy in an emerging market economy, which is gradually, but significantly, opening up.(a) Dynamics in Objectives: Growth and StabilityThe preamble to the Reserve Bank of India Act, 1934 sets out in a way broadly the tone of Reserve Bank’s monetary policy objectives: "to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage". I can do no better than quote one of my distinguished predecessors and current Chairman, Economic Advisory Council to the Prime Minister, Dr. C. Rangarajan on this subject: ' In a broad sense, the objectives of monetary policy can be no different from the overall objectives of economic policy. The broad objectives of monetary policy in India have been: (1) to maintain a reasonable degree of price stability and (2) to help accelerate the rate of economic growth. The emphasis as between the two objectives has changed from year to year, depending upon the conditions prevailing in that year and in the previous year.' … The emphasis as between the two objectives has changed from year to year, depending upon the conditions prevailing in that year and in the previous year.'Thus, although, unlike the current trend in many countries, there is no explicit mandate for price stability, the twin objectives of monetary policy in India have evolved as those of maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. The latter captures the growth objective by ensuring provision of adequate or appropriate liquidity to support investment and export demand. The relative emphasis placed on price stability and economic growth is modulated according to the circumstances prevailing at a particular point in time and is clearly spelt out, from time to time, in the policy statements of the Reserve Bank. Of late, considerations of macroeconomic and financial stability have assumed an added importance in view of increasing openness of the Indian economy. (b) Changes in the FrameworkA monetary targeting framework was in place since mid-1980s and till 1997-98 with broad money (M3) as an intermediate target. The aim was to modulate money supply growth, consistent with two parameters, viz., (a) the expected growth in real income, and (b) a projected or a tolerable rate of inflation. On the basis of these two parameters, the targeted monetary expansion was set. In practice, the monetary targeting framework was used in a flexible manner with feedback from developments in the real sector. … The Monetary Policy Department of the Bank organises discussions between the top management of the Bank and the select commercial banks as also with the industry associations, bodies representating markets and the significant industry groups. It also holds monthly meetings with select major banks and financial institutions, which provide a consultative platform for issues concerning monetary, credit, regulatory and supervisory policies of the Bank. Decisions on day-to-day money market operations, including management of liquidity, are taken by a Financial Markets Committee (FMC), which includes senior officials of the Bank responsible for monetary policy and related operations in money, government securities and foreign exchange markets. The Deputy Governor, Executive Director(s) and heads of four departments in charge of monetary policy and related market operations meet every morning as financial markets open for trading. They also meet more than once during a day, if such a need arises.Besides FMC meetings, Monetary Policy Strategy Meetings take place once every month. The strategy meetings take a near-term view of the monetary policy and consider key projections and parameters that can affect the stance of the monetary policy. In addition, a Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets comprising academicians and financial market experts, including those from depositories and credit rating agencies, provides support to the consultative process. The Committee meets once a quarter and discusses proposals on instruments and institutional practices relating to financial markets.

1. Introduction V.1 The conduct of monetary policy in a globalised environment faces the challenge of managing the impossible trinity1. It has become more complicated by spillovers from monetary policies of advanced economies in recent years. Announcement effects of the exit from unconventional monetary policies (UMPs) of systemically important central banks have exposed the limits on the effectiveness of monetary policy in spillovers-receiving economies. Risk-on risk-off shifts in market perceptions have imparted heightened volatility to cross-border capital flows and to changes in asset prices worldwide. Furthermore, because of hysteresis, implications for the real economy (especially the tradable sector) are not symmetric over phases of inflows and outflows. V. 2 Prior to the global crisis of 2008, there was an apparent consensus that flexible exchange rates can engender the space for independent conduct of monetary policy, even if the capital account is open. After the crisis, however, there is a clear intellectual shift justifying a non-trivial

It is not to ration the lending. It is only that, we would like the lenders to have adequate risk weights put in place and limits to be set in place for prudential monitoring. That's all. Yogesh Dayal: Thank you sir. I will move on to this side. Today, one TV channel has been launched, NDTV Profit. I will request Vishwanath Nair to ask his question from there. Vishwanath Nair, NDTV Profit: Whether these five policies of no action and maintaining this withdrawal of accommodation stance inadvertently communicate a neutral stance on rates to the market by any chance because you are not neutral yet, but five policies of no action could indicate that? Shaktikanta Das: I do not know on what basis you are reaching that conclusion. We do not communicate anything inadvertently. Let me make it very clear. All our communication is carefully prepared. We are aware that in the markets and the media, you analyse each and every corner of the statement, the comma, full stop, everything. So, we are very careful in our communication. There is no inadvertence in any of our communications. If somebody is assuming that it is a signal to move towards a neutral stance, it would be incorrect. It will not be correct at all. You look at the inflation trajectory. We are still away from 4% target and we have said that the Monetary Policy continues to remain actively disinflationary. … We are still away from 4% target and we have said that the Monetary Policy continues to remain actively disinflationary. So, it would be a mistake to read that we are giving any kind of signal that we are moving towards neutral. That would be a wrong interpretation. Yogesh Dayal: Thank you sir. I will invite Mr. Manojit Saha from Business Standard to ask his question. Manojit Saha, Business Standard: Good afternoon, sir. Is RBI comfortable with the EMIR-complied MoU with ESMA? Does that address the concern of inspection audit and possible penalty? Is RBI comfortable with that? And also, one clarification. You did not mention the word OMO this time. The sword had been hanging over the last two months. So, can we assume that it is off the table now because liquidity has been tightened? Shaktikanta Das: I will take the OMO question and with regard to the ESMA part, I will pass it on to DG Rabi Sankar. We have not said that it is off the table. We have announced that in the last meeting. We have very clearly mentioned in the statement that due to certain factors which are not in our control, like the demand for currency during the festival season, the build-up of cash balances in the Government, which, of course, have now started coming down as Government spending has picked up, and based on market movement like market interventions, which have an impact on liquidity. … Michael D. Patra: Actually, the Governor has explained this several times, but let me take the last attempt. So, in modern times, Monetary Policy is chiefly operated through the interest rate and Monetary Policy is a tool of stabilisation. By stabilisation, I mean that when GDP goes way above its trend the task of Monetary Policy is to bring it down to its trend, and when inflation goes above its target, Monetary Policy tries to bring down inflation to the target. Obviously, when this kind of thing happens, GDP goes above target or inflation goes above target, Monetary Policy raises the interest rate and conversely, when it is below, it reduces the rate. So, increasing and reducing rates is probably with some kind of benchmark. So, there is a certain benchmark where if inflation is at target and GDP is at trend; Monetary Policy has to neither restrict nor accommodate. At the current time, GDP is at potential, i.e., at trend with the new number, but inflation is way above target. If you take the average for the year, it is 5.4% and the target is 4%. So, we have to withdraw accommodation further to bring back inflation from 5.5% to 4%. That is the withdrawal of accommodation. Yogesh Dayal: So, on this side, we have missed out Mr. Pankaj Aher from Informist.

Significant gains were posted in the external sector, indicative of a growing resilience of the economy to cushion domestic activity against external and internal shocks. The run of current account surpluses that began in 2001-02 was extended into 2003-04 – a steady rise from 0.2 per cent of GDP to 1.4 per cent. The foreign exchange reserves rose to US $ 113 billion by end-March 2004 and further to US$ 119.3 billion as on August 13, 2004 Monetary Developments Monetary policy assigned priority to the revival of investment demand in the economy in 2003-04 in an environment of macroeconomic and financial stability. The expansionary effects of large capital inflows posed a challenge to monetary policy, especially since the absorption of liquidity through non-food credit remained lacklustre except in the last quarter of the year. This necessitated policy intervention almost continuously throughout the year to sterilise the capital flows and prevent undue monetary expansion. The institution of the Market Stabilisation Scheme in April 2004, which provides for issuance of Government securities exclusively for sterilisation operations, enhances the capacity of the Reserve Bank to deal with capital flows in future. Another noteworthy feature of macroeconomic management in 2003-04 was the reining in of inflationary pressures. Inflation receded in the first half of the year, reaching a trough in August 2003, before being driven up almost continuously up to January 2004 by a combination of international and domestic factors. … The inflation environment needs to be monitored closely on a continuous basis for any unforeseen developments either in the global or in the domestic environment, with a view to considering prompt as well as measured responses, as appropriate. Monetary Management The stance of monetary policy for 2004-05 continues to be guided by the objectives of provision of adequate liquidity for meeting credit growth and to support investment and export demand while keeping a very close watch on the movements in the price level. Consistent with the above, while continuing with the status quo, monetary policy would pursue an interest rate environment that is conducive to maintaining the momentum of growth as well as ensuring macroeconomic and price stability. The confluence of global factors - in particular, the rise in international interest rates - and domestic developments with respect to capital flows, liquidity management and the unforeseen impact of supply shocks have necessitated close and careful monitoring of price trends, keeping in view the policy preference for stability. In this background, the need, the extent and the timing of review of the policy stance would depend not only on these unfolding circumstances but also on the adjustments that take place in the financial markets, given their sensitivity to the global and domestic conditions. Finally, monetary policy would continue to enhance the integration of various segments of the financial market, upgrade credit delivery systems, nurture a conducive credit culture and improve the quality of financial services. … Finally, monetary policy would continue to enhance the integration of various segments of the financial market, upgrade credit delivery systems, nurture a conducive credit culture and improve the quality of financial services. The pursuit of price stability remains a key objective of monetary policy, especially in a country like India where a large majority of the population have no insurance against inflation. There is, thus, a need to consolidate the gains from reining in inflationary expectations especially as cross-country experiences suggest that public confidence can dissipate very quickly in the case of adverse movements in prices. An added dimension is the increasing sensitivity of domestic inflation to the movements in international commodity prices, with the opening up of the economy. The pursuit of price stability in future will call for a carefully crafted strategy in which monetary policy will not only need to address the demand side of the economy but also strike a fine balance in assessing the supply side of inflation, while enhancing prospects for growth. Real Sector Agriculture It is an imperative that the agricultural growth rate is enhanced to around 4 per cent per annum as the critical minimum in order to sustain an overall growth trajectory of the economy at 7 per cent and more.

The complex effects of monetary policy: asymmetries, irreversibilities, sectoraleffects, distributionaleffects Monetary authorities need to be especially sensitive to asymmetries in "controllability" and the costs associated with the conduct of monetary policy. While monetary policy may be an effective instrument in constraining output, it may be far less effective in stimulating the economy in a deep downturn. This, in turn, implies asymmetries in the conduct of monetary policy. There is always going to be uncertainty, for instance in judging the level of employment or growth at which inflation starts to increase or in judging whether there is a bubble. But a slight restraint on the economy in dampening a potential bubble has a miniscule cost relative to the costs imposing by the breaking of a bubble. This is an example where there are long–term, hard-to-reverse effects of mistakes. There are other examples: prolonged high unemployment gives rise to hysteresis effects, as skills atrophy. So too, advocates of monetary policy as a control instrument (over fiscal policy) stress its flexibility, the ability to fine tune policies as new information comes in. But they fail to note that some parts of the economy are more interest-sensitive than others, and some parts are more sensitive to the availability of bank credit than others. Hence loosening and tightening of credit induces more volatility in some sectors than others, and because of imperfections in risk markets, this imposes significant costs on these sectors. … The realization that it is partly because of--and in some cases mainly because of--market imperfections that monetary policy has the effects it does (or does not have the effects it is supposed to have) complicates monetary policy in many ways. It means that the simplistic notion, current in recent years, that all one needs to focus on is the real interest rate is simply wrong--even if one could figure out which real interest rate one should focus on. It implies too that the current fad to suggest that the reason that monetary policy is ineffective today is the zero lower bound is misguided. We are not in a Keynesian liquidity trap. It implies too that the effectiveness of monetary policy can be increased if monetary authorities work on increasing the effectiveness of the credit channel--strengthening the banks that are responsible, for instance, for SME lending and eliminating blockages in the mortgage market. These insights help us understand why QE II and QE III have not been effective--and are not likely to be. 12. Access to credit These experiences also highlight a point which is especially important in developing countries: lower T-bill rates do not necessarily translate into more access to credit. Access to credit for SME's is especially important for growth; and private financial systems, on their own, may not provide adequate access. … Modern monetary policy has to be based on these foundations.48 Monetary policy (understood broadly, to include financial regulatory policy) is of such importance in part because the financial sector is so important: the financial sector has been likened to the brain of an economy, and if the financial sector does not work well, the economy does not work well. In many countries around the world--including the US and the EU--the financial sector has not done what it should have done and done what it shouldn't have done; the costs of their failures in the US alone amount to trillions of dollars. In this lecture, I hope I have tried to describe what monetary policy based on a deeper understanding of the functioning of financial markets might look like. Most of the propositions that have been at the center of monetary policyfor the past quarter of a century need to be rethought. Monetary policy has not served our economies and societies well. It has arguably contributed to the growing inequality that has marked most countries around the world.49 But of this there can be no doubt: It has not only failed to stabilize the economy in the way that was hoped; but the way that some central banks have conducted monetary policy and regulation has been at the center of our greatest crisis in three quarters of a century.50 This should be the grounds for a revolution in monetary policy.

3.1 The framework of monetary policy has undergone far-reaching changes all over the world in the 1990s, mainly in response to the challenges and opportunities of financial liberalisation. There is, first of all, a clearer focus on price stability as a principal - though not necessarily the sole - objective of monetary policy. Besides, with the deregulation of financial markets and globalisation, the process of monetary policy formulation has acquired a much greater market orientation than ever before, inducing a shift from direct to indirect instruments of monetary control. This has been accompanied by several institutional changes in the monetary-fiscal interface to ensure that central banks possess the autonomy to anchor inflation expectations. 3.2 Monetary management is now further complicated by the increasing trade and financial openness. The opening up of the capital account, while necessary for efficiency of capital, exposes the economy to sudden switches in capital flows. This, in turn, can lead to large changes in exchange rates over short periods of time, not necessarily related to fundamentals. Volatility in capital flows and exchange rate impacts not only domestic demand and inflation, but also has implications for the maintenance of financial stability. Central banks are thus concerned not only about price stabilit

Monetary policy is not a sufficient condition. It is a necessary condition; we have provided that. We are confident that it will certainly translate into better credit growth. I am not able to give you a number. Obviously, and certainly with confidence one can say that it will certainly increase the flow of credit. And so that is why this liquidity is important, reduction in repo rate is important. To what extent, and what time frame it will take, that will be difficult to say. Puneet Pancholy:Thank you, sir. Next will be Mr. Ankur Mishra from ET Now. Ankur Mishra, ET Now:Thank you, Puneet sir. Good afternoon, Governor. I want to understand from you that you have given a statement in the monetary policy that today's steps should be seen towards propelling to a higher aspirational trajectory, and you are talking about growth. You have kept your target intact at 6.5%. Is there a scope of further revision ahead, which should be expected with the kind of actions you have taken? And also, I will once again ask on the stance front, but in a cricket analogy if you can explain, it was a roller coaster kind of a policy. The expectation was 25 basis point, you announced 50 basis point cut. Similarly, for CRR, the expectation was 50, you announced 100. But on the stance front, you got back to the crease and said I will wait and watch. So, how should one understand? Sanjay Malhotra:Well put. … Sanjay Malhotra:Well put. See the target you are saying, 6.5% is not the target, 6.5% is the forecast that we have made. And the aspiration is certainly much more, between 7% and 8%. We would like to grow as fast as possible. You have said it all. I don't have to say anything more. You have put it out very well, as to what this monetary policy, because everyone here in India, they may not understand our monetary policy, but they will understand the cricket lingo. So, you have put it out very well for your viewers. Puneet Pancholy:Thank you, sir. Now I will invite Ekta Suri from Zee Business. Ekta Suri, Zee Business:Good afternoon. Sir, the policy has been very well received by the markets. However, I want to ask questions which are little different from the market, how they have received it. Sir, my first question would be, in the last policy we had talked about the draft of gold loans. From that policy up to today's policy, you have thought of some changes, because many people also feel that if we are going to keep the gold as mortgage, it is possible that we may not have any proof of ownership, because we may have got it from our mother or someone else or it may not be hallmark. So, such tweaks, you must be thinking of changes in the rules. … Hitesh Vyas, Indian Express:Good afternoon, sir. Sir, in your Annual Report, you mentioned that one of the agenda for you would be studying monetary policy transmission as part of it, you will be revisiting optimal level of system liquidity. So, what is that liquidity level which you are looking so, that transmission is effective? Sanjay Malhotra:So, the study will look into those aspects. That’s why it's there. And if I knew the answer then it would not be there in the report. The study will go into those details as to what, how the liquidity should be maintained so as to be able to transfer or translate monetary policy into the money markets and into the credit markets. Puneet Pancholy:Thank you, sir. Hamsini Karthik, Moneycontrol:Governor, my questions have not been asked, therefore, if I can be allowed to ask my question. Sanjay Malhotra:How many are left? Only two? Puneet Pancholy:Sir, there are 3 actually. Sanjay Malhotra:Okay, we take last 3. Hamsini Karthik, Moneycontrol:Thank you. With respect to transmission, much of transmission will depend on how banks look at their deposit rates and where we are today. We have not seen much of a correction on the deposits front. Banks continue to keep deposit rates higher because the fight for deposits is still clearly there in the system. So, how do you expect this particular aspect to pan out, sir? In what sort of transmission do you expect to happen on the deposit side?

7.1 Monetary policy affects its final goals – prices and output – with long lags. Policies responding only to the current state of the economy may be destabilising and monetary authorities are, therefore, required to be forward-looking in their approach. A forward-looking approach would, however, be contingent upon a broad understanding of the monetary transmission mechanism - the process through which changes in monetary policy instruments affect output and inflation. Moreover, the transmission lags are not only long but often also found to be variable. The variability of the lags has been accentuated by the ongoing financial deregulation, liberalisation and innovations in a large number of economies. 7.2 Reflecting the process of financial liberalisation, there have been changes in operating procedures of monetary policy. Notably, monetary aggregates have been de-emphasised as an intermediate target of monetary policy and, for an increasingly large number of economies, short-term interest rates have emerged as the operating target of monetary policy. In this context, the speed and size of pass-through from policy rates to market rates become critical. Concomitantly, concepts such as neutral real rate have been an issue of debate. 7.3 Like other Emerging Market Economies (EMEs), monetary policy in India h

1. Introduction IV.1 The efficacy of monetary policy actions lies in the speed and magnitude with which they achieve the final objectives. With the deepening of financial systems and growing sophistication of financial markets, most monetary authorities are increasingly using indirect instruments (such as policy interest rates and open market operations) rather than direct measures (like credit allocation). Adjustments in the policy interest rate, for instance, directly affect shortterm money market rates which then transmit the policy impulse to the fuller spectrum of interest rates in the financial system, including deposit and lending rates, that in turn affect consumption, saving and investment decisions of economic agents and eventually aggregate demand, output and inflation. The interest rate channel of transmission has become the cornerstone of monetary policy in most countries. This channel may also operate through expectations of future interest rates, and thereby influence the behaviour of economic agents in an economy in a forward looking manner. IV.2 Underdeveloped and incomplete

Financial markets, driven by massive cross-border capital flows and the information technology revolution, immediately transfer the valuation of risks associated with uncertainty across the globe and this can lead to contagion. Indeed, global interdependence is marked by common shocks and a "confidence channel" rapidly transmits these shocks to various parts of the world. All this has rendered the conduct of monetary policy extremely complex in such an environment of interdependent risks. Therefore, even though monetary policy is conducted towards achieving domestic objectives, central banks have to follow developments across the world carefully. More than ever before, the choice of monetary arrangements depends on the choices that other countries make (Meltzer, 1997). In my lecture today, I propose to dwell upon the uncertainties that characterise the monetary policy environment, the underlying macroeconomic conditions in which monetary policy has to be set, the process of inflation and the changing institutional response to the commitment to price stability, the role of capital flows and what the future holds in store. Against this backdrop, I hope to shed some light on the emerging discussion among central bankers about the course of monetary policy that is of greater relevance to developing countries such as ours. II. The Current Global Economic Scenario The growing internationalisation of monetary policy has been brought into sharp focus by the synchronised global downturn since the late 1990s. In response, monetary authorities all over the world have made concerted efforts to ease their policy stance significantly. … The key policy challenge for an emerging economy would be to put in place mutually supportive safeguards to ensure both monetary and financial stability. The most important lesson for us is that financial imbalances can build up even when inflation is low and hence monetary policy should have a slightly longer time horizon in terms of inflation. Apart from the above, there are merits to all countries in greater transparency, combining simple rules with discretion and effective communication. Orderly development of financial markets can make a big difference regarding the manner in which risks and shocks make an impact on the economy. A flexible exchange rate regime imparts greater flexibility in monetary policy to deal with shocks more efficiently. On the prudential side, it would imply strengthening further the macro-prudential orientation. Monetary policy and prudential regulation should, therefore, co-exist. Greater transparency and cooperation between monetary policy and supervision has been increasingly recognised the world over and has resulted in many central banks publishing financial stability reports. Although there is uncertainty about how economies operate and about monetary policy itself, uncertainty is no excuse for not pursuing price stability. In the pursuit of monetary goals, monetary policy authorities could adopt formal models and policy rules, informal target rules or case-by-case decision making. In practice, no central bank relies exclusively on formal models to derive final policy. Models assist central banks to take judgments. … Monetary policy formulation has become more complex and interdependent. Continuous monitoring of financial markets, upgradation of technical skills at the central bank, flexibility and eternal watchfulness hold the key to making monetary policy matter in the evolving global environment. A key factor that guides the conduct of monetary policy is how to achieve the benefits of market integration while minimizing the risks of market instability. An integral component of central bank work is the development of financial markets that can increasingly shift the burden of risk mitigation and costs from the authorities to the markets. The adverse implications of excess volatility leading to financial crises are more severe for low-income countries. They can ill-afford the downside risks inherent in a financial sector collapse. Central banks need to take into account, among others, developments in the global economic situation, the international inflationary situation, interest rate situation, exchange rate movements and capital movements while formulating monetary policy. References Eichengreen, Barry. "Can Emerging Markets Float? Should they Inflation Target?". Paper Presented to a Seminar at the Central Bank of Brazil. February 2002. European Central Bank. "Monetary Policy-Making under Uncertainty". Monthly Bulletin. Pp. 43-55. January 2001. Feldstein, Martin. "Monetary Policy in an Uncertain Economy". NBER Working Paper, 9969. September 2003. Government of Japan. "Annual Report on the Japanese Economy and Public Finance". October 2003. Greenspan, Alan. "Monetary Policy Under Uncertainty". Remarks at a Conference on "Monetary Policy and Uncertainty: Adapting to a Changing Economy" at Jackson Hole, WY.

There are some comforting factors — well-functioning financial markets, robust rural demand, lower headline inflation and comfortable foreign exchange reserves — which buffered us from the worst impact of the crisis. The fiscal stimulus packages of the Government and monetary easing and regulatory action of the Reserve Bank have helped to arrest the moderation in growth and keep our financial markets functioning normally. Monetary Policy Action Consistent with the current assessment of macroeconomic and monetary conditions, the Reserve Bank has decided to: reduce the repo rate under the LAF by 25 basis points from 5.0% to 4.75% with immediate effect. reduce the reverse repo rate under the LAF by 25 basis points from 3.5% to 3.25% with immediate effect. keep the CRR unchanged at 5.0% of net demand and time liabilities (NDTL). Reserve Bank’s Policy Thrust The thrust of the Reserve Bank's policy stance since mid-September 2008 has been aimed at providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining continued credit flow to productive sectors. Taken together, the policy measures of the Reserve Bank have ensured that the Indian financial markets continue to function in an orderly manner. These measures have augmented actual/potential liquidity in the financial system by over Rs.420,000 crore. This should assure financial markets that the Reserve Bank will continue to maintain comfortable liquidity. … These include: (a) supporting the drivers of aggregate demand to enable the economy to return to its high growth path; (b) boosting the flow of credit to all productive sectors of the economy; (c) managing the large government borrowing programme in 2009-10 in a non-disruptive manner; (d) restoring the fiscal consolidation process; (e) ensuring an orderly withdrawal of the large liquidity injected in the system since September 2008 by the Reserve Bank to support the economy's productive requirements; and (f) the continued challenge of preserving the stability of our financial system drawing from the lesson of the global crisis. Finally, the overarching challenge is to ensure an interest rate environment that supports revival of investment demand. Since October 2008, as the inflation rate has decelerated and the policy rates have been cut, market interest rates have also come down. But the reduction in interest rates across the term structure and across markets has not been uniform. Let me therefore reiterate that there is scope for the overall interest rate structure to adjust downwards. Indeed, the further policy rate cuts effected as part of this policy should be a definitive signal for reducing lending rates. Monetary Policy Stance On the basis of this overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows: Ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path. … Monetary Policy Stance On the basis of this overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows: Ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path. Continuously monitor the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimize the impact of adverse developments and reinforce the impact of positive developments. Maintain a monetary and interest rate regime supportive of price stability and financial stability taking into account the emerging lessons of the global financial crisis. Developmental and Regulatory Issues Let me now turn to development and regulatory issues. In tailoring these policies, we have been mindful of the lessons of the global financial crisis as they apply to India. The policy statement has a detailed listing and explanation. I will only highlight a few. Our banking system remains inherently sound and the financial markets are functioning normally. In the wake of the global financial crisis, however, several initiatives have been taken in an unprecedented coordinated manner at the global level with a view to resolving the crisis and strengthening the international financial architecture. India has been a part of the various global initiatives.