subir gokarn : monetary policy – key factors shaping trajectory article by dr subir gokarn, deputy governor of the reserve bank of india, published on www. livemint. com on 22 september 2011. * * * for energy - importing economies such as china and india, monetary policy is going to be influenced by global oil price movements as long as oil remains the predominant incremental source of energy. the core objectives of monetary policy in the future will remain what they have been in the past. the primary objective of monetary policy is a low and stable inflation. in achieving this, the economy has to be allowed to maintain growth at the highest possible rate consistent with a low and stable inflation. however, the context in which these objectives are pursued obviously changes over time. in my view, there are three key factors that are playing an important role in the current indian context. each of them has a bearing on both the monetary stance and the strength of the monetary transmission process. non - inflationary rate of growth ( nirg ) the first critical factor is the maximum rate of growth that the indian economy can generate without provoking inflationary pressures. this notion is a core building block in monetary economics, though it is typically labelled the potential growth rate of the economy. the concept is very simple. if the economy is growing faster than its potential, capacities and resources are stretched. producers and workers find it relatively easy to raise prices and wages in the face of buoyant demand for their goods and services. rising prices across the board then translate into generalized or broad - based inflationary pressures. on the other hand, if the economy is growing below its potential, resources are idle, making it difficult for workers and producers to ask for higher wages or prices. inflation is low and will remain so until the economy reaches its potential growth rate. the challenge for monetary policy, then, is to find and maintain a stance that keeps the economy as close as possible to its potential growth rate. grow any faster and there is a risk of inflation becoming entrenched ; grow any slower and growth is being needlessly sacrificed. do we know what india ’ s nirg is? in the recent past, at what rates of growth have significant inflationary pressures been triggered? looking back over the past two decades ( see chart 1 ), we have three distinct episodes of accelerating inflation following a growth spurt. the first is in the mid - 1990s, when inflation surged during a three -

of framing the vision document covering the period up to 2011. given the wider range of economic activities that impact and in turn are influenced by the presence of a safe and efficient retail payments infrastructure in the country, developments in these systems can be harnessed to widen the scope of coverage of the services particularly in the context of financial inclusion. in countries like ours, developments in retail payments and their delivery channels can be effectively dove - tailed for bridging not only geographical gaps but also in terms of extension of financial activities and access to these activities to a wider section of society. payment and settlement systems in india have, and i am sure it is the case in many other jurisdictions too, players that are common across the retail and wholesale segments. access criteria for membership to the clearing houses that provide the retail products ( cheques, ach, etc. ) and eligibility to offer various payment products ( pre - paid instruments, mobile payments, etc. ) should be stringent enough to permit only strong entities with better risk management practices to enter. what we should aim for is a level - playing - field with players firmly - on - the - ground. infirmities and arbitrage opportunities in one segment should not be allowed to transcend into the other. procedures should be in place to benchmark and lay down the expectations and roles of different stakeholders in each product - segment. the endeavour should be to correspondingly benchmark these requirements and standards with international standards, wherever they are available. a word of caution – the international standards and benchmarks, including vendor solutions operating elsewhere, have to be dovetailed and customised to suit domestic requirements and situations. deliberations in seminars such as these also need to highlight the need for a set of standards or recommendations for best practices in the context of retail payment systems just as the prescriptions in the context of sips or securities settlement systems etc. may be a beginning could be made along the lines of the european central bank's " oversight standards for euro retail payment systems " ( june 2003 ) which seek to apply some of the core principles for sips to specific retail payment systems as well depending upon the assessment made by the central bank with respect to the systemic implication such retail systems can have. in the indian context, we have already made our electronic funds transfer systems such as rtgs ( real time gross settlement ) and neft ( national electronic funds transfer ) compliant with the fatf ( financial action task force ) requirements on wire transfers. we have