n., and e. nelson, ( 2001 ), ” optimal horizons for inflation targeting ”, journal of economic dynamics & control, 25, 891 - 910. see footnote 2 for details. ” monetary policy in sweden ” replaces the clarification of monetary policy published in 1999, see heikensten, l. ( 1999 ), ” the riksbank ’ s inflation target – clarifications and evaluation ”, sveriges riksbank quarterly review, 1999 : 1, 5 - 17. in this context, let me also mention something about risks. more specifically, the risks connected to rising asset prices and credit expansions. this is a question that has been much discussed in recent years, both between central banks and within the academic world, as house prices have risen rapidly in many countries including sweden. this debate could in itself be the topic of a speech so let me just briefly say that the position of the riksbank is that we do not consider it to be reasonable to entirely ignore these risks, even though it might be difficult to take these risks into account in the usual forecasting process. we have therefore acted to reduce these risks and to contribute to a calmer adjustment in house prices. the inflation forecast and future interest rate developments one of the recent changes in our strategy was the assumption regarding the development of the policy rate, which is used as a base for our forecasts. like most central banks with an inflation target, the riksbank previously made forecasts under the assumption that the policy rate would not change during the forecast period. since october last year we instead use an assumption that has gained in popularity among central banks, namely that the policy rate will develop in line with market expectations, as reflected in implied forward rates. the earlier assumption had the advantage that it illustrated in a simple manner when there was reason to change the policy rate. if inflation two years ahead was expected to be lower than two per cent, this was a signal that the interest rate needed to be cut, and if it was expected to be higher, the rate needed to be raised. of course, this rule could not capture all of the nuances in the monetary policy considerations, but it provided a rough explanation of the monetary policy decisions. however, there were also disadvantages. in normal cases it is not, for instance, particularly realistic that the policy rate would remain unchanged a couple of years ahead. the fact that the forecasts were based on this assumption made it

of full normalcy in global financial markets ; ( b ) the evolving financial contagion ; and ( c ) the possible spill - over to the real sector after accounting for the possible extent of “ decoupling ”. the major reason for extraordinary vigilance by the reserve bank of india, at this juncture, is what i would describe as simultaneous volatilities in several globally significant markets, namely, money, credit and currency markets ; asset prices ; and commodity prices, especially oil and food items. the current phenomenon of simultaneous volatilities should be viewed in the context of possible repositioning of the world ’ s dominant reserve currency, involving significant wealth, income and terms of trade effects. ladies and gentlemen, let me now turn to the indian economy in greater detail. before independence, during the first five decades of the 20th century ( 1900 - 01 to 1946 - 47 ), the annual average growth performance of the indian economy was very low, averaging 0. 9 per cent per annum. since the beginning of the planned development process, in the early 1950s, the gdp growth displayed a self - accelerating tendency reaching a level of around 6. 0 per cent in the 1990s. two exceptions during this phase were the dipping of the growth rate in the 1970s to 2. 9 per cent and during the crisis year of 1991 - 92 1 when the growth was as low as 1. 4 per cent. in the new millennium, the gdp growth rate has accelerated further averaging 6. 9 per cent during the seven - year period 2000 - 01 to 2006 - 07, while the growth rate in the last four years ( 2003 - 04 to 2006 - 07 ) averaged 8. 6 per cent. in 2005 - 06 and 2006 - 07, it has grown still higher at 9. 0 per cent and 9. 4 per cent, respectively. during this phase too, in one year during 2002 - 03, the growth rate dipped to 3. 8 per cent due to drought conditions in several parts of the country leading to significant fall in agricultural production. the strengthening of economic activity in the recent years has been supported by persistent increase in gross domestic investment rates from 24. 3 per cent of gdp in 2000 - 01 to 33. 8 per cent in 2005 - 06 and domestic saving rate from 23. 7 per cent in 2000 - 01 to 32. 4 per cent during 2005 - 06. it is important to note that over 90 per cent of investment during this period was financed by domestic savings.