Y V Reddy: Indian economy - review, prospects and select issues
Address by Dr Y V Reddy, Governor of the Reserve Bank of India, at the Central Bank of Chile,
Santiago de Chile, 7 June 2007.
* * *
Governor Corbo and Friends,
I am honoured by the kind invitation of Governor Corbo to visit the esteemed Central Bank of Chile.
We, in the Reserve Bank of India, deeply appreciate the gesture. Governor Corbo is respected for his
lucid expositions on complex issues in various international fora. While his analysis of monetary policy
challenges in Chile is a matter of interest to the central bankers, his understanding of global
developments, especially of Emerging Market Economies is also appreciated. The performance of the
Chilean economy over the last 15 years has attracted international interest and is often considered to
be an interesting model of structural reforms, liberalization and stabilisation. The Chilean experience
with management of capital inflows and temporary recourse to unique Chilean type of tax on cross
border capital flow is often discussed in both academic and policy circles.
The visit of Governor Corbo to India in January 2004 was the first by a Governor from Latin America to
visit the Reserve Bank of India in the recent years. The scholarly speech that he delivered on the
recent developments and prospects of the Chilean Economy was very well received in the Reserve
Bank.
Today, in my presentation, there would be a brief review of the Indian economy, followed by
assessment of short term and medium term prospects. I will conclude by addressing select issues in
the conduct of policy in the areas of money and finance in India, as they are likely to be of interest to
the audience here.
I. A brief review of the Indian economy
India's Constitution adopted in 1950 had established parliamentary form of democracy and India has
been a republic with universal adult suffrage, which has contributed to significant stability of political
system. It is a now a federation with 28 States and seven Union territories. While the largest State
(Uttar Pradesh) has a population of 166 million the smallest State (Sikkim) has a population of only
0.54 million. There is significant diversity in religious faiths with different States having majority of
population belonging to different faiths such as Hindu, Islamic, Christian and Buddhist faiths. India is a
host to the largest number of practicing Zoroastrians (of ancient Persia) in the world. There are 22
languages recognised by the Constitution of India as major languages spoken by a large section of
society. While the boundaries of the States are based, by and large, on language, they have also been
redrawn in the past to accommodate local aspirations. This is unique for any federation and reflects a
subsisting spirit of accommodation. Furthermore, the local self-governments, right up to the village
level, are mandated by the Constitution.
Growth
Sometimes India is described as a re-emerging economy since in the 18th century, this area had
accounted for about a quarter of world output - but that is part of history. The annual growth rate of
GDP in the geographical area of India in the first half of 20th century is estimated to be around an
average of 0.9 per cent per annum and per capita income at an average rate of 0.1 per cent per
annum. The economy of independent India which is of contemporary interest had to be built upon the
overhang issues of second World War, the trauma of partition, the integration of princely states
numbering over 500 and a low level of GDP.
From an annual average growth rate of 3.5 per cent during 1950 to 1980, the growth rate of the Indian
economy accelerated to around 6.0 per cent in the 1980s and 1990s. In the last four years (2003-04 to
2006-07), the Indian economy grew by 8.6 per cent. In 2005-06 and 2006-07, it had grown at a higher
rate of 9.0 and 9.4 per cent, respectively.
Stability
An important characteristic of the high growth phase of over a quarter of century is resilience to shocks
and considerable amount of stability. We have witnessed only one serious balance of payments crisis
triggered largely by the Gulf war in the early 1990s. Credible macroeconomic structural and
stabilization programme was undertaken in the wake of the crisis. The Indian economy in later years,
could successfully avoid any adverse contagion impact of shocks from the East Asian crisis, the
Russian crisis during 1997-98, sanction like situation in post-Pokhran scenario, and border conflict
during May-June 1999. Seen in this context, this robust macroeconomic performance, in the face of
recent oil as well as food shocks, demonstrates the vibrancy and resilience of the Indian economy.
Saving and investment
The average saving rate in India was 10 per cent in the 1950s, which rose to 17.5 per cent in the
1970s and further to 23.41 per cent in the 1990s. The saving rate was 32.4 per cent in 2005-06. The
strengthening of economic activity in the recent years has been supported by persistent increase in
gross domestic investment rates from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06. It
may also be noted that over 95 per cent of investment during this period was financed by the domestic
savings.
Inflation
Since independence, the inflation rate, in terms of the wholesale price index (WPI), on average basis
was above 15 per cent in only five out of fifty years. In thirty-six out of fifty years, inflation was in single
digit and on most occasions high inflation was due to shocks - food or oil. The tolerance level to
inflation has been low, relative to many developing countries, especially on account of the democratic
pressures in the country.
The inflation rate accelerated steadily from an annual average of 1.7 per cent during the 1950s to 6.4
per cent during the 1960s and further to 9.0 per cent in the 1970s before easing marginally to 8.0 per
cent in the 1980s. However, the inflation rate declined from an average of 11.0 cent during 1990-95 to
5.3 per cent during the second half of the 1990s (1995-2000) and further to 4.9 per cent during
2003-07.
More recently during 2006-07, WPI based inflation rate increased from 4.1 per cent at the end of
March 2006 to an intra-year peak of 6.7 per cent at end-January 2007 and remained firm in the range
of 6.1-6.6 per cent in the succeeding weeks before moderating to 5.7 per cent by the end of the
financial year (as on March 31, 2007). As on May 19, 2007, the WPI inflation rate was 5.1 per cent.
Fiscal performance
The average gross fiscal deficit of the central government as per cent to GDP during the decade of
1980s was 6.8 per cent as against 3.8 per cent in the 1970s. The Reserve Bank had to facilitate the
financing of budgetary imbalances from the banking system as also through monetary
accommodation. As interest rates were administered and not market determined, the interest rates on
public debt were kept artificially low. By the early 1990s, as the budgetary imbalances became
unsustainable, percolating into the overall macroeconomic imbalance and financial repression ensued,
the Government had to initiate a programme of stabilisation and structural reforms, inter alia, to bring
down the budgetary imbalances.
A major landmark in the interface of the Reserve Bank with fiscal developments was the Supplemental
Agreement between the Reserve Bank and the Government to terminate the process of automatic
monetisation through phasing out ad hoc Treasury Bills and introduction of a system of Ways and
Means (WMA) advances from April 1997. However, the Reserve Bank continued to participate in the
primary market by privately placing/devolving the issues of government securities on its own account
in the market. Subsequently, however, under the provisions of the Fiscal Responsibility and Budget
Management (FRBM) Act, 2003, the Reserve Bank no longer participates in the primary market
auction of the government securities since April 2006.
The Government of India is pursuing the path of rule-based fiscal consolidation from the year 2004-05
under the FRBM Act, 2003 and FRBM Rules, 2004. The underlying purpose of the targets set under
this legislative mandate has been to reduce the ratio of gross fiscal deficit (GFD) to gross domestic
product (GDP) to three per cent by 2008-09. Furthermore, the revenue deficit (RD) to GDP ratio has
been targeted to touch 0 per cent by 2008-09 so that borrowed resources can be used to meet only
capital expenditures. The progress of targeted fiscal consolidation has been satisfactory so far and
GFD/GDP and RD/GDP ratios are budgeted to reduce to 3.3 per cent and 1.5 per cent, respectively, in
2007-08; the objective is to meet the FRBM targets by 2008-09 and remain at those levels in 2009-10.
External sector
The average current account deficit since 1950-51 has been around one per cent of the GDP. During
this period, except for 11 years when there was marginal surplus in the current account, we had
modest deficit during the rest of the years.
After the Independence in 1947, higher imports and capital outflows, led by partition, resulted in
significant deficit in the balance of payments necessitating running down of the accumulated sterling
balances. However, the signs of strain in the balance of payments were clearly visible from the
Second Five Year Plan (1956-61) onwards. Though the devaluation of 1966 brought to the fore the
problems associated with the overvalued exchange rate, it did not bring immediate desired
improvement in the balance of payments position. The remittances from Indians working abroad
became a new source of meeting the growing financing needs in the 1970s. However, the second oil
price shock during 1979-80 proved to be the precursor of another phase of strain on India's balance of
payments.
In the aftermath of the balance of payment crisis in the early 1990s, several stabilisation and structural
reform measures were undertaken. The hallmark of the reform process has been a gradual, cautious
approach that incorporated a careful sequencing and phasing across different sectors of the economy.
Recognising the macro-economic implications of volatility associated with capital flows, India has
adopted a policy of managing the capital account with a preference for non-debt flows. Consistent with
the principle of hierarchy of capital flows, India has been making efforts towards encouraging more
inflows through FDI and enhancing the quality of portfolio flows by strict adherence to "Know Your
Investor" principle. Going forward, the pace of further liberalization will critically depend on the reforms
in real and fiscal sectors as also global developments.
In the recent period, India's external sector has become resilient with the current account deficit being
maintained at modest levels after a few years of marginal surplus during 2001-02 to 2003-04. External
sector indicators show considerable level of sustainability attained in the last decade. Sustained
growth in export of services and remittances has continued to provide buoyancy to the surplus in the
invisible account, which has enabled financing a large part of trade deficit. The capital flows have been
buoyant leading to sustained rise in foreign exchange reserves. The merchandise trade deficit is
currently close to 7 per cent of GDP; however, the current account deficit is under 1.5 per cent of
GDP, mainly due to the knowledge and competitive advantage we have in services and the steady
support from remittances from Indians working abroad.
Financial sector
The experience during the initial period after Independence shows that institution building and
development of the financial system was propelled by the needs of the country's central planning. It
was considered necessary to ensure that sectoral needs of credit to agriculture and industry were met
in accordance with the Plan priorities. The Reserve Bank was vested with the major responsibility of
developing the institutional infrastructure in the financial system. With a view to expand the outreach,
the 14 largest commercial banks were nationalized in July 1969 as a major step to ensure adequate
credit flow into genuine productive areas in conformity with Plan priorities. Again in 1980, six more
private sector banks were nationalised, thus further extending the domain of public control over the
banking system.
Since the beginning of the reform period in 1991, the approach towards the financial sector in India
has been to move away from financial repression and consistently upgrade the system by adopting the
international best practices through a consultative process. Financial sector reforms were carried out
in two phases. The first phase of reforms was aimed at creating market-oriented financial institutions
operating in an environment of operational flexibility and functional autonomy. The focus of the second
phase of financial sector reforms has been on strengthening of the financial system consistent with the
movement towards global integration of financial services.
Major policy measures during the reform of the banking sector include phased reductions in statutory
pre-emption like cash reserve and statutory liquidity requirements and deregulation of interest rates on
deposits and lending, except for a select segment. The diversification of ownership of banking
institutions is yet another feature which has enabled private shareholding in the public sector banks,
through listing on the stock exchanges, arising from dilution of the Government ownership. On account
of healthy market value of the banks' shares, the capital infusion into the banks by the Government
has turned out very profitable for the Government. Foreign direct investment in the private sector
banks is now allowed up to 74 per cent, subject to the prescribed guidelines. There have been new
banks, new instruments, new windows, new opportunities and, along with all this, new challenges.
Banks have been provided significant freedom in their resource allocation through working of the
market mechanism. The Reserve Bank has endeavoured to establish an enabling regulatory
framework with prompt and effective supervision, and development of legal, technological and
institutional infrastructure.
The co-existence of the public sector, private sector and the foreign banks has generated competition
in the banking sector leading to a significant improvement in efficiency and customer service. The
share of private and foreign banks in total assets increased to 27.6 per cent at end-March 2006 from
24.7 per cent at end-March 2005 and less than 10.0 per cent at the inception of reforms.
Currently, all scheduled commercial banks are compliant with the minimum capital adequacy ratio
(CRAR) of 9 per cent. The overall CRAR for all scheduled commercial banks stood at 12.4 per cent at
end-March 2006. The overhang of gross non-performing assets of scheduled commercial banks has
declined from 8.80 per cent of advances in 2002-03 to 3.30 per cent in 2005-06. Operating expenses
as a ratio of total assets of Indian scheduled commercial banks has declined from 2.24 per cent in
2002-03 to 2.11 per cent in 2005-06.
As development of the financial markets is an ongoing process, initiatives to further deepen and widen
the various segments of the financial markets would have to be continuously pursued. Since the
overall objective of maintaining price stability in the context of economic growth and financial stability
will remain, the effort will be to harmonise the deregulation and liberalisation of financial markets with
the domestic developments in real as well as fiscal sectors and global developments in international
financial architecture.
II. Prospects
Short-term prospects
The distinguishing feature of India's macroeconomic performance in 2006-07 has been the strong
acceleration of growth. Industry and services, comprising over 80 per cent of the economy, registered
double-digit growth. While there seems to be evidence of structural changes taking place in the
economy, there are indications that the upsurge of demand pressures in 2006-07 may contain a
cyclical component. As regards structural changes, first, the recent growth momentum is driven by a
step-up in the investment rate, which, in turn, is supported by a sizeable increase in the rate of gross
domestic saving. This noteworthy improvement is attributable mainly to a distinct increase in corporate
saving and turnaround in public sector dis-saving from 2003-04 onwards, while household saving
continues to remain the mainstay of gross domestic saving. Second, India's linkages with the global
economy are getting stronger, underpinned by the growing openness of the economy. Third, there is
evidence of improvements in total factor productivity and the efficiency of capital use.
There are cyclical factors also underlying the recent growth experience. First, robust global GDP
growth, which exhibited four years of strong expansion, has been supportive of high growth in India.
Second, the persistent high growth in bank credit and money supply, the pick-up in non-oil import
growth and the widening of the trade deficit in recent years together indicate upside pressures on
aggregate demand. Third, cyclical forces are also evident in the steady increase in prices of
manufactures, resurgence of pricing power among corporates, indications of wage pressures in some
sectors, strained capacity utilisation and elevated asset prices.
It is important to assess India's recent macroeconomic performance against the evolving configuration
of risks, which are likely to shape the outlook. First, the buoyant growth in industry and services has
been somewhat marred by the setback to agriculture which has suffered substantial deceleration and
volatility. It is now widely recognised that the performance of agriculture is critical not only for output
and employment but also, particularly for price stability. While over 60 per cent of the workforce is
dependent on agriculture, the sector accounts for barely 20 per cent of the GDP.
Second, alongside shortfalls in agricultural performance, large gaps have emerged in the physical
infrastructure. Rapid growth in demand for infrastructure with a less than proportionate supply
response in the prevailing investment climate has resulted in stretching of the capacity utilisation in
electricity generation, roads, ports and major airports.
Third, domestic developments in 2006-07 in terms of firming up of inflation through the year, led
mainly by rising prices of primary articles, has been a matter of concern.
Monetary and financial conditions are reflecting these demand-supply gaps as well as the onset of a
durable pick-up in aggregate spending. The acceleration of growth in the real sector has been
reflected in the upward shift in the growth trajectory of non-food credit extended by commercial banks.
The expansion in non-food credit at 29.8 per cent in the period 2003-04 to 2006-07 is unprecedented
in the history of the Indian economy. There has been some sign of deceleration in the recent period as
growth in year on year non-food credit was 27.2 per cent as on May 11, 2007 as compared with 32.3
per cent during the same period last year.
In consonance with the rising capital flows, the reserve money growth has been higher in the recent
period averaging 17.8 per cent during 2003-07. The rate of growth of reserve money was 23.3 per
cent as on May 18, 2007 on year on year basis (20 per cent a year ago).
Similarly, the high credit growth in the recent period has led the money supply growth to remain high
averaging 16.7 per cent during 2003-07. During 2006-07, the money supply grew by 20.7 per cent. As
on May 11, 2007, the growth in money supply on year on year basis was 20.2 per cent (18.2 per cent
a year ago).
Taking into account the high expansion of money supply worldwide, and given the monetary overhang
of 2005-07, it is important to contain monetary expansion in 2007-08 at around 17.0-17.5 per cent, in
consonance with the outlook on growth and inflation. The Annual Policy Statement for the year
2007-08 also placed aggregate deposits growth in 2007-08 at around Rs.4,900 billion and a graduated
deceleration of non-food credit to 24.0-25.0 per cent in 2007-08.
Monetary policy in India has to also contend with the burden of challenges emanating from other
sources. First, it is recognised that monetary policy has to contend with the high level of public debt
and fiscal deficit. While the recent improvements in the fiscal position of States and significant
consolidation in the finances of the Centre have to some extent alleviated the situation, the fiscal
position may need further strengthening as we proceed with further liberalisation of financial sector
and capital account. Second, in the recent period, the enduring strength of foreign exchange inflows
has complicated the conduct of monetary policy, as such inflows can potentially reduce the efficacy of
monetary policy tightening by expanding liquidity. Third, in India, levels of livelihood of large sections
of the population are inadequate to withstand sharp financial fluctuations, which impact real activity.
Accordingly, monetary policy has to also bear the burden of protecting these segments of the
economy from volatility in financial markets often related to sudden shifts in capital flows. Fourth, a
situation in which aggregate supply is less than elastic domestically imposes an additional burden on
monetary policy. While open trade has expanded the supply potential of several economies, it does
not seem to have had any significant short-term salutary effect on some supply elasticities.
The operation of monetary policy in India is also constrained by some uncertainties in transmission of
policy signals to the economy. First, despite the progressive deregulation since the early 1990s, some
categories of interest rates continue to be administered, thereby muting the impact of monetary policy
on the structure of interest rates. Second, external sector management is complicated by the
incentives for some elements of capital flows provided by public policy setting. Thus, the magnitudes
and direction of capital flows to select sectors in the domestic economy are beset with uncertainties in
regard to the global and domestic environment not necessarily related to economic fundamentals or
the monetary policy setting. Third, the operation of monetary policy has to be oriented around the
predominantly public sector ownership of the banking system which plays a critical role not only in the
transmission of monetary policy signals but also in other public policy considerations.
Overall, the Reserve Bank projects the real GDP growth in 2007-08 to be around 8.5 per cent,
assuming no further escalation in international crude prices and barring domestic or external shocks.
For the year 2007-08, the Reserve Bank's policy endeavour would be to contain inflation close to 5.0
per cent. In the medium term, in recognition of India's evolving integration with the global economy
and societal preferences, the resolve, going forward, is to condition policy and expectations for
inflation in the range of 4.0-4.5 per cent.
Medium-term prospects
The Approach Paper for the Eleventh Five Year Plan (2007-08 to 2011-12) targets an average annual
growth of 9 per cent relative to 8 per cent targeted by the Tenth Plan (2002-03 to 2006-07). This
aspiration for growth would require significant acceleration in investment from 27.8 per cent in the
Tenth Five Year Plan to 35.1 per cent in the Eleventh Five Year Plan. While half of the increase in
investment is expected to come from private investment in farms, small and medium enterprises and
in the corporate sector, the rest is estimated to emanate from public investment with a focus on the
infrastructure sector. The higher level of investment is proposed to be financed by some combination
of increased domestic savings and increased foreign savings. A significant portion of the required
increase in domestic savings is expected to come from an improvement in government savings.
Household savings and private corporate savings can also play a major role in this regard.
Realising that the growth benefits need to trickle down further, the Eleventh five year Plan is likely to
provide an opportunity to restructure policies to achieve a new vision based on faster, more
broadbased and inclusive growth. Doubling of agricultural GDP growth to around 4 per cent is particularly
important in this context. The Approach Paper suggests that this must be combined with policies to
promote rapid growth in non-agricultural employment so as to create 70 million job opportunities in the
11th Plan.
Very recently on May 29, 2007, our Honourable Prime Minister announced a major scheme to double
the growth rate of agriculture to 4.0 per cent over the 11th Plan period. The Government would provide
rupees 250 billion for new farm initiatives launched by States. A time-bound Food Security Mission
was also announced to counter rising prices of food products and to ensure visible changes in their
availability over three years.
If these objectives are achieved, the percentage of people in poverty could be reduced by 10
percentage points by the end of the Plan period. The policy reforms and monitorable targets as
indicated in the Approach Paper, particularly on education, health, women and children, infrastructure,
when attained, are expected to benefit a larger chunk of population immensely. This will help in
making the Indian growth process more inclusive and durable.
The Approach Paper to the 11th Five year Plan suggests that growth target for industrial sector and
manufacturing sector could be placed at 10 per cent and 12 per cent, respectively during the Plan
period. This is based on the assumption that India has also the potential of emerging as a favoured
manufacturing destination of the world especially in respect of certain manufacturing activities,
characterized by entrepreneurial dynamism and cost competitiveness.
The services sector in the country has benefited from the availability of vast skilled labour and is
expected to continue to lead the economy, drawing from its linkage with the well performing industrial
sector and expanding international trade. The Approach Paper puts special focus on services sector
so that its potential to create employment and growth is fully realised.
There is commitment on the part of the Government to pursue the process of fiscal correction and
consolidation. The task ahead for the central Government is to achieve the FRBM targets, especially
the elimination of revenue deficit by 2008-09. Favorable factors towards this end are buoyancy in
taxGDP ratio and turnaround in public sector dis-saving from 2003-04 onwards.
To reap the rewards of demographic dividend, public policy has a critical role to play towards creating
a quality social infrastructure in terms of education and health and also generate employment which
can help the easy and productive absorption of the prospective "youth bulge".
The Approach Paper emphasises further financial innovation, particularly the insurance and pension
sectors, which are considered to be good sources for meeting the long-term-financing requirement of
the infrastructure sector. The policy approach being followed is likely to ensure greater outreach of
banking business, and also, in the present scenario of high growth, enable the banks to usefully lend
to the disadvantaged sections and successfully pierce the informal credit segment.
III. Select issues in the conduct of policy
Multiple objectives
The preamble to the Reserve Bank of India Act, 1934 sets out the Bank's objectives as "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". Although
there is no explicit mandate for price stability, as is the current trend in many countries, the 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. In essence, monetary policy aims to maintain a
judicious balance between price stability and economic growth. The relative emphasis between price
stability and economic growth is governed by the prevailing circumstances at a particular time and is
spelt out from time to time in the policy announcements of the Reserve Bank. Financial stability,
subsumed in monetary stability, has gained in importance since the second half of the 1990s.
The Reserve Bank discharges the functions of debt manager and banker to the government of India
and the State governments. Regulation and supervision of banks and non-banking financial
companies are also assigned to Reserve Bank. In addition to management of current and capital
account transactions of external sector, development and regulation of the money, government
securities and forex markets are also the functions of the RBI. Payment systems also fall within the
purview of the RBI.
Measurement and targeting of inflation
An appropriate inflation indicator should reflect price changes of the constituent items accurately and
provide some understanding of the headline inflation. The consumer price index (CPI) is generally
favoured as an indicator of inflation for monetary policy. Given the widely differing consumption
baskets as between the rich and the poor, between the rural and the urban areas and even across
regions in India, a single CPI index could be less representative. Hence, a measure of producer prices
to which the wholesale price index (WPI) is akin, is currently treated as more representative and
familiar across the country. However, the growing importance of services in the consumption basket
makes the WPI less representative. There are occasions when divergence between WPI and CPI is
larger than usual. In view of these considerations, we do monitor and disseminate all the CPI
indicators, while using this as relevant information for policy formulation. In parallel, we are doing
technical work on computing a Harmonised Consumer Price Index, and we are in consultation with the
government in this regard.
It is increasingly recognised that monetary policy should be associated with managing inflation
expectations also. The guiding criterion for inclusion of a variable in the inflation indicators panel would
be the information content on future inflation. We are now actively working on collecting information
relating to real-sector indicators of future inflation, such as variability of output around trend / potential,
capacity utilisation, inventory, corporate performance, industrial/ investment expectations and other
indicators of aggregate demand.
In India, we have not favoured the adoption of an explicit inflation-targeting framework for several
reasons. First, the monetary policy in India has the twin objectives of growth and price stability but the
relative emphasis between the two keeps varying depending upon the circumstances. Second, we
have had a record of moderate inflation, with double digit inflation being the exception, and largely,
socially unacceptable. Third, the adoption of inflation targeting requires the existence of an efficient
monetary transmission mechanism through the operation of efficient financial markets and absence of
interest rate distortions. In India, although the money market, government debt and forex markets
have indeed developed in recent years, they still have some way to go, whereas the corporate debt
market is yet to develop. Though interest rate deregulation has largely been accomplished, some
administered interest rates still persist. Fourth, in an economy as large as that of India, with numerous
regional differences, and continued existence of market imperfections in factor and product markets
across regions, the choice of a universally acceptable measure of inflation is also difficult. Fifth,
inflationary pressures often emanate from significant supply shocks related to the effect of the
monsoon on agriculture in addition to oil prices.
We do not have the concept of core inflation but for purposes of analysis as well as articulation, we
identify the impact of fuel- and food-price shocks. These two items are often subject to shock - both
external and domestic. The two items also have a large weight in the basket, especially of
consumption. It is also difficult, ex ante, to differentiate between the shock and the permanent
components.
We, in the Reserve Bank, since three years, have nevertheless articulated, with significant impact,
tolerance limit of i