combination of direct and indirect instruments, in multiple forms, to suit the conditions affecting transmission mechanism. fourth, there are occasions when the medium - term goals, say reduction in cash reserve ratio for banks, conflict with short - term compulsions of monetary management requiring actions in both directions. such operations do warrant attention to appropriate articulation to ensure policy credibility. drawing a distinction between medium - term reform goals and flexibility in short - term management is considered something critical in the current indian policy environment. fifth, while there is considerable merit in maintaining a broad distinction between monetary and prudential policies of the central bank, the rbi did not hesitate, as a complement to monetary tightening, to enhance the provisioning requirements and risk weights for select categories of banking assets, namely real estate, housing and capital market exposures. these measures were needed to specifically address the issues of rapidly escalating asset prices and the possible impact on banks ’ balance sheets in a bank dominated financial sector. this combination, and more important, readiness of the rbi to use all instruments, has a credible impact, without undue restraint on growth impulses. sixth, some of the important factors that shaped the changes in monetary policy framework and operating procedures in india during the 1990s were the delinking of budget deficit from its automatic monetisation by the rbi, deregulation of interest rates, and development of the financial markets with reduced segmentation through better linkages and development of appropriate trading, payments and settlement systems along with technological infrastructure. with the enactment of the frbm act in 2003, the rbi has withdrawn from participating in the primary issues of central government securities with effect from april 2006. the recent legislative amendments enable a flexible use of the crr for monetary management, without being constrained by a statutory floor or ceiling on the level of the crr. the amendments also removed the statutory floor of 25 per cent on the statutory liquidity ratio ( slr ) – which would further improve the scope for flexible liquidity management by the rbi. iv. major issues in analytics of monetary policies let me now discuss some major issues in the analytics of monetary policy in india. it is generally recognised that monetary policy framework, to be efficient and effective requires a reasonable assessment of potential output, a measure of unemployment, and above all a convincing measure of inflation. monetary authorities are acutely aware of inherent and growing difficulties in regard to all these three but in india, perhaps the problems are less than fully appreciated. first, the measurement of potential output,

of india ’ s imports, as well as a slowdown in exports reflecting falling global demands. the current account deficit ( cad ) significantly widened during fy 2012 – 13 to touch the high of 4 % of gdp. the widening of cad in the backdrop of large decline in capital flows exerted severe downward pressure on rupee with consequent volatility. 3. in this context, it has to be appreciated that the volatility regime has undergone a significant shift and volatility in most of the asset classes as well as segments of financial markets has risen significantly since the onset of the global financial crisis in august 2007. the forex, equity, bond, and commodity markets have been extremely volatile during the period as global economic outlook remains “ unusually uncertain ” making it difficult for economic agents to make optimal and informed decisions. in the foreign exchange market, the direction of rupee ’ s movement has remained largely in sync with that of several emerging market currencies and more so with some of the major currencies but the magnitude of depreciation has been far more pronounced. bis central bankers ’ speeches 4. the so called “ new normal ” in the dynamics of inr - usd exchange rate also reflects greater influence of the global financial markets on the domestic foreign exchange market mainly due to india ’ s growing trade and financial integration with the rest of the world. india ’ s two way trade ( merchandize exports plus imports ), as a proportion of gdp, was 40. 7 per cent in 2008 – 09, the crisis year, up from 19. 6 per cent in 1998 – 99. the ratio of total external transactions ( gross current account flows plus gross capital account flows ) to gdp – an indicator of both trade and financial integration – was 112 per cent in 2008 – 09 up from 44 per cent in 1998 – 99. 5. there is another fundamental aspect that we cannot lose sight of. indian rupee has to adjust its value vis - a - vis other major foreign currencies to reflect inflation and growth differentials. in a market ruled by multiplicity of pressures, it is too optimistic to expect this adjustment to always happen in a smooth and secular manner spread across the time horizon. the experience of the recent past should carry an important and valuable lesson for all of us. any stability over an extended period of time could be a harbinger of volatility. if so, too much stability, instead of breeding complacency among corporates