convert a large part of these into financial assets. so while banks may be focusing on corporate banking to boost its asset side, it should not miss the opportunities that the liabilities side of business provide and should aggressively protect its turf by gearing up for competition from non - bank financial institutions. ii. 3 competition, consolidation and globalisation to re - shape indian banking competition in not a choice before the indian banking. it would come naturally aided by regulatory impulses and increased openness of the indian economy. not only will there be increased number of players but the number and type of products and services will undergo a change. with likelihood of an increasing competition over the next decade, there could be a process of consolidation among banks as has been the case elsewhere in the world. it is expected to be a market - driven process. cost improvements in output efficiency are likely to emerge from this process as banks seek to reap economies of scale and scope. mergers could be fruitful for smaller banks so they can increase their scale and expand into new product lines. the recent financial crisis has reopened debate on the scale and scope economies in the context of big banks being too big to fail. for instance, nobel laureate, john vickers clearly advocated splitting large uk banks to combat the problem of too - big - to - fail. in us too, some regulatory features have been added through the dodd - frank act to increase the social utility of the largest, most complex financial firms. in india, most banks that operate are as yet not of a global size. they are not big enough to be competitive. so our problems are different. we need to develop a vision of banking over next decade that incorporates not only m & a but changes in structure and in operational framework. banks will need to consider “ end - to - end ” operational changes that places customer on the top of the pyramid and then redesign the processes. our first priority is to bring about universal financial inclusion. however, once financial inclusion is achieved, banks can focus on consolidation. competition and consolidation, in turn, may prompt globalization of indian banks. india is viewed as one of the biggest growth stories among emerging markets. trade in goods, services and finance has exploded. foreign banks are increasingly seeking to be present in india. they could find easier entry through the wholly - owned subsidiary route. indian banks also have aspiration to turn global. indian businesses are making overseas acquisitions even as large inward fdi is taking place. this would impel banks to globalize

that we have drawn for the inflation targeting regime. therefore, i would like to take this opportunity to highlight some important elements of the formal inflation targeting regime once more in this meeting today. under this regime, the central bank adopts a medium - term perspective. accordingly, inflation targets are announced for a period of three years. the targets pertain to consumer inflation and these “ point targets ” are set jointly with the government. however, with the aim of setting a rule for the bank ’ s accountability principle in case inflation deviates from the target or in case a possibility that inflation might deviate from the targets emerges, an uncertainty band has been set as 2 percentage points in both directions. in case inflation figures go outside the band or there is a possibility of inflation going outside the band, the mechanism pertaining to the accountability principle of the central bank would be activated and our bank would explain the reasons of deviation from the target and provide information on the time needed for converging to the target again in an open letter to the government. such an open letter was written and sent to the government on july 14, 2006 and was also publicized. a lot of ground has been covered in the fight against inflation since 2002. however, price stability is yet to be established. it should be borne in mind that this is a long and tough journey. the developments we have observed in the last few months verify this view and make our efforts even more important. within this framework, in this part of my speech, i would like to talk about the developments in inflation and the monetary policy responses in the face of these developments since the beginning of 2006 and touch upon the future inflation outlook. i am sure you have been following very closely the upward trend in inflation observed since the turn of the year. annual inflation became 10. 12 percent in june 2006, exceeding the upper limit of the uncertainty band of the inflation path consistent with the end - year inflation target and this upward trend continued in july with 11. 69 percent. the factors that played a primary role in the upward move in inflation in the first seven months of the year were seasonal factors and external developments. prices of unprocessed food products started to increase due to adverse weather conditions by the last few months of 2005 and inflation in this group reached 21. 8 percent by july 2006. another factor that had an unfavorable impact on inflation was the rise in crude oil and energy prices. parallel to the rise in crude oil prices that started in international markets