is including the information that has become available after the decision was made. this is, in other words, an assessment after the fact, or what can be called an assessment ex post. although it may be very interesting to analyse the shocks that occurred after the monetary policy decisions were made, it is practically self - evident that monetary policy could have been better if the shocks that occurred later had been known at the time the decisions were made. an assessment after the fact is not therefore necessarily the most relevant form of assessment. a more relevant approach is to put ourselves in the position of the decision makers at the time the decision was made and to try to assess the decision given the information that was then available. in other words. perform an assessment based on the information available to the decision makers, or what can be called an assessment ex ante. the question that should then be answered is whether the analysis and the interest rate decision were reasonable given the information and the forecasts available at the time. did the riksbank, for example, arrive at a reasonable balance between stabilising inflation and stabilising resource utilisation? an assessment based on the information available to the decision maker also has the great advantage that it can be conducted in real time immediately after the publication of the monetary policy decision and the information and analysis on which the decision is based. one does not thus need to wait for a couple years to see what the outcomes for inflation and the real economy will be. the decisions of the riksbank can therefore be assessed and debated on an ongoing basis. an important part of the assessment of a flexible inflation targeting policy is to assess how credible the inflation target is, measured in terms of the extent to which various economic agents ’ inflation expectations correspond to the inflation target. if inflation expectations are stable close to the inflation target then the target is credible and it will therefore be easier for the riksbank to stabilise both inflation and resource utilisation. as i have already said, it takes time for monetary policy to have an impact on inflation and the real economy. monetary policy is therefore governed by forecasts. it is a question of choosing a repo - rate path so that the forecast for inflation and resource utilisation entails the best possible stabilisation of inflation and resource utilisation. as the forecasts play such a central role in the monetary policy decisions, it is of course important that the riksbank employs good forecasting methods and uses all the

in the late 1990s, in view of the ongoing financial openness and increasing evidence of changes in the underlying transmission mechanism with interest rates and exchange rates gaining in importance vis - a - vis quantity variables, it was felt that monetary policy exclusively based on the demand function for money could lack precision. the rbi, therefore, formally adopted a multiple indicator approach in april 1998 whereby interest rates or rates of return in different financial markets along with data on currency, credit, trade, capital flows, fiscal position, inflation, exchange rate, etc., are juxtaposed with the output data for drawing policy perspectives. such a shift was gradual and a logical outcome of measures taken during the reform period since the early 1990s. the switchover to a multiple indicator approach provided necessary flexibility to respond more effectively to changes in domestic and international economic environment and financial market conditions. in the context of monetary policy making, let me highlight some recent developments : first, the availability of instruments to manage, in the context of large capital flows and sterilisation, has been strengthened with open market operations through market stabilisation scheme ( mss ), which was introduced in april 2004. under the mss, the rbi was allowed to issue government securities as part of liquidity sterilisation operations in the wake of large capital inflows and surplus liquidity conditions. while these issuances do not provide budgetary support, interest costs are borne by the fisc ; as far as government securities market is concerned, these securities are also traded in the secondary market, on par with the other government stock. second, another development in the recent period has been to fix a numeraire to inflation. the rbi ’ s self - imposed medium - term ceiling on inflation at 5. 0 per cent has had salutary effect on inflation expectations and the socially tolerable rate of inflation has come down. in recognition of india ’ s evolving integration with the global economy and societal preferences in this regard, going forward, the resolve would be to condition policy and expectations for inflation in the range of 4. 0 - 4. 5 per cent. this would help in maintaining self accelerating growth, keeping in view the desirability of medium - term inflation at around 3 per cent to ensure india ’ s smooth global integration. third, while the preferred instruments are indirect, and varied, there is no hesitation in taking recourse to direct instruments also, if circumstances so warrant. in fact, complex situations do warrant the dynamics of different