how much inflation the central bank will create into all nominal variables such as interest rates. to the extent that high inflation is harmful for growth and welfare, a central bank that continuously tries to give short run positive surprises will entrench long run high inflation, which will be bad for growth. bis central bankers ’ speeches put differently, when people say “ inflation is low, you can now turn to stimulating growth ”, they really do not understand that these are two sides of the same coin. the rbi always sets the policy rate as low as it can, consistent with meeting its inflation objective. conversely, the best way the monetary authority can support growth over the medium term is to anchor inflation at low levels so that policy rates can also be low. we can never abandon inflation to focus on growth, nor do we focus on inflation to the exclusion of growth. the extended glide path over which we are bringing inflation in check appropriately balances inflation and growth. the statement “ inflation is low, you can now turn to stimulating growth ” also perhaps reflects a misunderstanding of how central banking works. monetary policy works with a lag of 3 to 4 quarters. so in deciding policy today, we need to predict how inflation will look approximately a year ahead. today ’ s inflation therefore matters only in informing us about future inflation. however, today ’ s inflation measured on a year on year basis may be low because there was an unexpected price spurt last year – the so - called base effect. so we need to take out base effects before we even assess the information from current inflation, something many observers fail to do. also, there may be many sources of uncertainty that cloud the future inflationary picture and disconnect it from current inflation – the strength and distribution of the monsoon, the extent and persistence of low commodity prices, the effect of external disturbances on the exchange rate, etc. in practice, we use models to project how all this might play out on inflation, and we overlay the models with the subjective assessments that our internal committee and its advisors offer, to ultimately arrive at a policy decision. our model based assessments of the inflation path are almost surely going to differ a little from the realization, given that the world is uncertain, but they are our best professional assessments, and we set policy based on those assessments. as information comes in, monetary policy is adjusted – for instance, the substantial disinflation from november 2013 gave us confidence about the persistence of low inflation into the future, allowing us

impact in crisis times. 25. the governor has recently announced a medium term framework in this regard, which includes : • a target of what fraction of the sovereign bond market will be constituted by fpis in the medium term. • announcement of staggered increase in limits every six months and these being released on monthly / quarterly basis • limits to be specified in rupees so that they do not vary with exchange rate movement. the framework will create space for participation of different kinds of investors ( long term investors, such as, pension funds and sovereign wealth funds as well as medium term investors and those coming through international central security depositories, such as, euroclear and clearstream. 26. we are in dialogue with the government. once the framework is decided, we may wait for suitable market conditions, including possibly greater certainty about federal reserve actions and appropriate liquidity conditions in domestic markets, before making a public announcement. permitting other regulated entities in otc derivatives and repos 27. as i have mentioned above, explicit regulation of otc markets is one of the cornerstones of the financial sector regulatory framework in india. with the gradual strengthening of the market infrastructure, greater participation of different entities in the otc derivatives market can be considered other than the reserve bank regulated entities. it is proposed to explore various options in consultation with the government and other bis central bankers ’ speeches regulators to permit a wider set of regulated entities greater access to otc derivative markets subject to the laid down reporting requirements. electronic dealing platform for repo in corporate bonds 28. guidelines on repo in corporate debt were issued in january 2010. since then, the guidelines have been relaxed in terms of minimum haircut / margin requirements and allowing more entities like multilateral institutions, government owned nbfcs, etc. to participate in repo market. however, there is very limited trading volume in corporate debt repo market. in order to develop the repo market, it is proposed to introduce an electronic dealing platform for repo in corporate. to begin with, a request for quote system could be considered and depending on market response, it could slowly graduate to a full - fledged order matching system. review of guidelines on repo in g - sec and corporate bonds – expanding participation base and relaxing certain conditions 29. existing repo guidelines also put various restrictions on entities accessing the repo market through csgl route, viz. prohibition on repo transactions between primary member and its client and two clients of the same custodian, etc