being faculties and students of leading business schools, must be already having a sense of that from the financial dailies. i am sure many of you may be having your own assessment of the inflation situation and your own expectations from the rbi in terms of what it should or should not do. i would try to cover in my address the way we see the recent inflation path in terms of its determinants, and why monetary policy matters so much, even if that alone is not sufficient to ensure a low and stable inflation environment. monetary policy can still ensure a fast softening of inflation but only at the cost of large sacrifice of growth, which is equally non desirable as high inflation. low inflation and robust growth – both are essential to improve economic welfare. fiscal policy also has a major role in inflation management, both in terms of containing government demand in the short - run and augmenting the supply situation in the medium - term. the effectiveness of monetary policy improves in a supportive fiscal environment. i will, therefore, also cover some of the fiscal issues in this address, and by doing so, i will try to touch upon some other dimension of the overall theme of this seminar. let me start with the oft asked question of why inflation has persisted despite rbi ’ s significant anti - inflationary monetary policy response. when we say that inflation has been “ high ” over successive months over almost two years now, it has to be seen as a relative bis central bankers ’ speeches concept. it could be high relative to either past averages or the inflation goal of the rbi. prior to the global crisis, the average wpi inflation over the five year period 2003 – 04 to 2007 – 08 was about 5. 5 percent. since january 2010, however, the wpi inflation has remained within a range of 8 to 11 percent in each of the 22 successive months. that is high relative to what we experienced before the crisis. moreover, rbi ’ s monetary policy statements suggest that rbi ’ s monetary policy continues to aim at conditioning and containing perception of inflation in the range of 4 to 4. 5 percent. the recent inflation trend, therefore, is clearly above the stated comfort level of the rbi. what explains then this persistence of high inflation? india was already dealing with double digit inflation when it had to face the contagion from the global financial crisis. india avoided a financial crisis at home, but there was some moderation in growth. along with the beneficial impact of sharp moderation in global commodity prices

levels since the global crisis, the debt levels as percentage of gdp have not increased. in fact liabilities ( of the centre and states ) as percentage of gdp have declined from 71. 4 percent in 2007 – 08 to 64. 3 percent in 2010 – 11. high inflation and associated higher growth in nominal gdp has contributed to this moderation. besides the level of liabilities relative to gdp, there are certain other features of india ’ s government debt that merit specific attention in the context of standard vulnerability assessments about sovereign debt. in india a large of the public debt is held by residents ; the weighted average maturity of debt above ten years for the central government is much more than what we see in many other countries ; and growth in nominal gdp has generally exceeded the nominal interest rates. notwithstanding these pro - debt sustainability features, however, in nominal terms gross market borrowings of the central government had spiked from about rs. 180, 000 crore in 2007 – 08 to rs. 320, 000 crore in 2008 – 09. since then, the size of the borrowing programme has only increased further, and in 2011 – 12, as against budgeted gross borrowing programme of about rs. 470, 000 crore, an additional rs 52, 000 crore has been announced. this order of market borrowings, besides creating crowding - out concerns, also complicates management of the borrowings in a tight liquidity condition. it was highlighted often in the immediate aftermath of the global crisis that countries must improve their fiscal position to regain fiscal space so at to deal with future shocks to the economy. in india, with the more than expected moderation in gdp growth in the second quarter of 2011 – 12, and bis central bankers ’ speeches given the persistence of headwinds from weak global macro - financial conditions, the importance of fiscal space would be better appreciated. in the context of the theme of the conference, some may ask this question whether one could hedge the inflation risk and thereby escape the shrinking value of money. in india, many seem to use gold as an inflation hedge, and high gold prices of recent years, as we know, has not deterred gold buying in india. the basic law of demand – i. e. when prices increase demand must decline – does not seem to apply to demand for gold by indians. high inflation is a risk to financial savings, since it can reduce the value of savings accumulated over the years. making financial instruments available in the system that could provide an effective hedge against inflation