) monetary policy our monetary policy, continuously decried by business lobbies and regularly denounced by the press with an eye, no doubt, on their advertisers, confounded its critics by measuring up to its primary task of bridling inflation. at the beginning of the year, we had anticipated that higher commodity prices would drive up headline inflation but it would decline by end - 2011. the monetary policy committee ( mpc ) raised the key repo rate ( krr ) at two successive quarterly meetings in march and june by 50 and 25 basis points, respectively. these hikes contributed to contain inflationary pressures. at the september meeting, although inflation expectations were still high, the mpc maintained its stance as the global economy recovery was showing signs of losing momentum. in december, as the euro sovereign debt crisis had intensified causing the domestic economic outlook to be clouded by still greater uncertainty, the mpc proceeded to a very small cut of 10 basis points, the first time that the krr was moved by less than 25 basis points, to 5. 40 per cent per annum to manifest its concern about the low level of business and consumer confidence while avoiding undue risks on the inflation front. headline inflation rose from 3. 3 per cent in january to 6. 6 per cent in november before declining to 6. 5 per cent in december. barring unforeseen shocks, we expect both year - on - year and headline inflation to moderate this year and gradually move within a narrowing range around our comfort level of 4 – 6 per cent. ( more on this issue ) bis central bankers ’ speeches review of the mpc i had explained on several occasions the rationale for a thorough review of the functioning of the mpc in the light of its operating experience of four years. this was entrusted to sir alan budd, a former member of the bank of england mpc. he made a number of recommendations in his report which, i am glad to note, supported my own line of thinking. we have taken some decisive steps to enhance the independence and transparency of the mpc : beginning with the 4q 2011 mpc meeting, the minutes of mpc meetings and the pattern of individual votes are being published ; and there were legislative changes in december 2011 to sever the remaining formal links with the board of directors of the bank. ( more on this issue ) financial and money market developments we addressed the issue of excess liquidity which could have fuelled inflationary pressures by a judic

value in terms of goods and services be viewed as predictable. losses in purchasing power will tend to discourage the use of a currency, but so will any excessive price fluctuation that raises the risk of holding it. in addition, if a currency is seen as a viable store of value in times of general uncertainty, it will attract investors even when times are not so uncertain. clearly, many currencies meet this test ; yet few emerge as international currencies. other factors will govern the selection from among the body of sound currencies. one is a strong, competitive economy open to, and active in, international trade and finance. such an economy will naturally generate a large quantity of foreign exchange transactions with at least one leg in the home currency to support its wide - ranging business activity. this factor evidently goes a long way toward explaining the dominance of the dutch guilder in the seventeenth and eighteenth centuries, the british pound in the nineteenth and early twentieth centuries, and the dollar today. another factor is the presence of an open and well - developed financial system, a factor, of course, that tends to be part, perhaps a necessary part, of a strong competitive open economy. a welldeveloped financial system increases the attractiveness of doing business in a currency for at least two reasons. first, such a system offers a number of ancillary services to participants in international markets, who may want to borrow or invest in a currency or to hedge foreign currency positions. to the extent that these activities can be accomplished efficiently in a currency, that currency will be more attractive as a currency in which to conduct business. second, deep and liquid financial markets that offer a full array of instruments and services will attract business from abroad that might otherwise have stayed at home. because of financial market constraints at home or other barriers to efficiency, for example, borrowing or investing abroad in an international currency and exchanging the proceeds for domestic currency might be cheaper than conducting the transactions directly in the home currency. thus, a currency supported by a well - developed financial system is likely to encourage greater international use, above and beyond needs associated directly with international business activity. as a consequence, the volume of gross international capital flows denominated in the currency are likely to be high, adding to its desirability, regardless of whether, on net, these capital flows are positive or negative at any point in time. these international currency determinants are clearly interrelated. strong financial systems tend to develop in strong