perfect measure of demand - side inflation – what is conventionally referred to as “ core ” inflation – a practical measure that reflects the underlying forces to an extent is the sub - component of the manufacturing component of the wpi, which excludes food products. chart 3 displays the pattern of this sub - component “ non - food manufacturing inflation ”. as growth slowed in 2008 – 09, this indicator also moved downwards. it actually went into negative territory for a few months, before turning marginally positive in december 2009. while this turnaround was clearly not indicative of any rapid build - up of demand pressures, the fact that it had happened was a signal that the business cycle had bottomed out and growth was on its way back up. however, after that rather sedate start, this indicator began to accelerate rather rapidly in the early months of 2010. at the time that this article was written, the numbers for june 2010 had just been released ; this indicator had risen to 7. 3 per cent. the inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. it is incumbent on the government and the central bank to use all the means at their disposal to rein inflation in. in this effort, monetary policy has two specific objectives : ( i ) to prevent the spillover of supply - side pressures into a more broad - based inflationary process and ( ii ) to moderate demand to levels consistent with the capacity of the economy to meet it without provoking price increases. monetary policy : thought and action let us look at the thinking and actions on the monetary front against the backdrop laid out above. as already indicated, drastic monetary actions were taken during the last quarter of 2008, sharply bringing down both the policy rates and the crr. looking back on this period, it can be reasonably argued that these measures contributed to the stabilization of the economy and the relatively small impact of the crisis by infusing massive amounts of liquidity into the system. the fiscal stimulus, which came in various forms during the same period, helped by directly creating demand in a situation in which private demand was sluggish. without these combined interventions, the outcome would almost certainly have been far worse. the monetary stance remained in a critically supportive mode until october 2009, when the first steps to move towards a normal position were taken. table 1 lists all the monetary actions taken from then until end - july 2010. four key concerns have influenced the sequence and magnitude

of monetary policy. during the first phase of financial sector reforms, various structural rigidities were eased, so as to bis central bankers ’ speeches increase participation in financial markets as well as develop and strengthen inter - linkages amongst market segments, and foster competition. the focus of various reform measures in financial market was on ensuring adequate liquidity in various segments of the market spectrum, and developing the regulatory, legal, institutional and technological infrastructure for orderly functioning of market activity. in the second phase of reforms, more sophisticated financial instruments were introduced. further, issues relating to the stability of financial markets received priority in the policy agenda. the key objective of the external reforms was to move to a more open trade regime by correcting for the implicit anti - export bias. moreover, there was a greater recognition of the need to view trade policies, exchange rate policies and industrial policies in an integrated manner. in pursuance of this, the administered exchange rate regime gave way to a flexible market - determined system. the exchange rate has since been guided by underlying demand and supply conditions and the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed or preannounced target or band. the trade policy reforms comprised withdrawal of the quantitative restrictions on exports and imports, phasing out of the system of import licensing and lowering the level and dispersion of nominal tariffs so as to bring them on par with the east asian economies. the peak customs tariff rate was progressively brought down from 150 per cent in 1991 – 92 to 10 per cent by 2008 – 09. the liberalization of restrictions on various external transactions led to current account convertibility under article viii of the articles of agreement of the imf in 1994. with respect to capital account liberalization, india embarked on a gradual and well sequenced opening up of the capital account. the active capital account management framework was based on a preference for non - debt creating capital inflows like foreign direct investment and foreign portfolio investment. the capital account is virtually free for nonresidents and resident corporates with some restrictions on financial institutions and higher restrictions on resident individuals. economic progress post - 1991 the initiation of economic reforms in the 1990s saw india gradually breaking free of the low growth trap which was euphemistically called the “ hindu growth rate ” of 3. 5 per cent per annum. real gdp growth averaged 5. 7 per cent per annum in the 1990s, which accelerated further to 7. 3 per cent per annum in 2000s. a