mr. rangarajan elucidates the monetary and credit policy of the reserve bank of india for the first half of the 1997 - 98 financial year address by the governor of the reserve bank of india, mr. c. rangarajan, at the madras chamber of commerce and industry at chennai on 19 / 4 / 97. i would like to take this opportunity given to me to speak to you this afternoon to focus on the monetary and credit policy for the first half of 1997 - 98 which was announced a few days ago. it may be useful at the outset to review the major developments during 1996 - 97. 2. the growth rate of broad money ( m3 ) in 1996 - 97 was 15. 6 per cent which was within the targetted band of 15. 5 - 16. 0 per cent. the real gdp is expected to have grown by 6. 8 per cent. the inflation rate as measured by the change in the wholesale price index was 7. 3 per cent on a point - to - point basis. a notable feature of 1996 - 97 was that the money and foreign exchange markets were generally calm in contrast with the turbulence witnessed in these markets in the previous year. a strong growth in bank deposits, coupled with substantial reduction in cash reserve requirements resulted in abundant liquidity in the system. however, the off - take of bank credit was subdued. short - term money market rates have moved down as a result of the easy liquidity conditions. lending rates are known for their stickiness and remained at high levels during the first half of 1996 - 97 but softened later. there has been a strong accretion to the foreign exchange reserves. the slow growth in non - food bank credit, the persistence of relatively high lending rates despite comfortable liquidity in the banking system and the acceleration of inflow of funds from abroad call for active monetary and exchange rate management by the reserve bank. 3. while the overall growth momentum has been sustained in 1996 - 97, divergent trends were observed in various sectors with agricultural output showing an impressive recovery and industrial growth slowing down. even within the industrial sector, the decline in growth rates in mining and electricity sectors was sharp. the inflation rate at 7. 3 per cent was a matter of concern. while manufacturing prices rose only by 5. 1 per cent, primary articles recorded an increase of 8. 3 per cent. during 1996 - 97, procurement of foodgrains was low, while the off - take was high. with the result, buffer

. this is because the resulting economic slowdown and inflation go hand - in - hand. past experience and the consensus among economists suggest that, when there is a high risk of second - round effects, in other words when a cost shock feeds into overall price increases by way of rising wages, monetary tightening is necessary. in the situation we face today, however, the financial markets are very unstable and their future direction is unclear. we therefore need to be cautious in coping with price pressures. this is because the downside risks to growth increase while the upside risks to prices dwindle, as the financial market turmoil has an ever greater impact on the real economy. a forward - looking monetary policy that takes account of medium and long term macroeconomic trends also becomes more difficult at a time like this, as uncertainty mounts concerning economic conditions at home and abroad. for countries facing foreign currency fund - raising problems, meanwhile, constraints on monetary policy easing may exist even when the downside risk to growth is substantial. easing of monetary policy could adversely affect their foreign exchange supply and demand conditions. even though central banks are confronted with such manifold difficulties, however, they must do their utmost as far as circumstances allow, to prevent the erosion of the foundation for price stability. only if they act in this way can central banks, whose main purpose is the maintenance of price stability, retain public confidence. and on this basis they can secure the effectiveness of their monetary policy. closing remarks fellow central bankers, i am sure that this week's seminar will provide an opportunity for lively discussion on the most desirable ways for central banks to tackle the stagflation threat, particularly when financial markets are in turmoil as they are today. drawing my remarks to a close, let me express my wish that this seminar may contribute to stronger cooperation among all of our central banks, by fostering good fellowship among us. although i know your days this week will be fully occupied, i hope you will also spare a few moments to savor the beauties of korean culture and the autumn colors.