central bankers ’ speeches • low and stable inflation is an essential pre - condition for securing medium - term growth. only in a situation of price stability can consumers and investors make informed decisions. • the reserve bank's monetary stance has been aimed at restraining demand and at managing inflation expectations. • admittedly, monetary tightening has resulted in some sacrifice of growth in the short - term. that is an inevitable price to pay for price stability. but the sacrifice in growth is only in the short - term. in the medium - term, there is no trade - off between growth and inflation. philips curve another facet of this growth - inflation debate that has played out in the recent period has been the growth - inflation trade - off in the context of the philips curve. • the argument is that we can raise growth by tolerating higher inflation. this is misguided. • relationship between growth and inflation is non - linear. • there is a threshold level of inflation. • below the threshold, may be, there is a trade - off between growth and inflation. • above the threshold, there is no trade - off between growth and inflation, higher inflation actually leads to loss of growth. with wpi inflation at 7. 25 per cent and cpi inflation in double digits, we are way above the threshold. • what is the threshold level of inflation? that maybe around 5 per cent. inflation today is above the threshold. dr. patel ’ s dictum about maintaining growth with price stability is the quintessential objective of monetary policy. • that is something that we are deeply conscious of and that is something we are adhering to in the reserve bank even today. ii. communication challenges the second issue i want to talk about is communication challenges. there is a paper by dr. patel and i quote a sentence from the paper : “ apart from communicating its own slant on national and international trends, there are three special areas which need attention. the first is the glamorous but elusive area of what the central bank communicates and how it does so in relation to its specific responsibility for monetary and foreign exchange policy ; the second is communication on issues in regard to its regulatory functions ; and the last is communication with the government of the day, including parliament. ” oxymoron i am deeply struck by this statement by dr. patel. not so much by the content, not so much by the context, but by the fact that dr. patel chose to say it at all.

when measured in proportion to total assets, for public sector banks relative to private banks ( chart 3b ). 5 / 12 bis central bankers'speeches duration of investment book and the maturity structure of g - secs the high interest rate exposure of banks from their g - sec portfolios is attributable to not only the size of their holdings, but also to the increasing maturity of primary issuance. the weighted average maturity of the stock of government securities has increased steadily from 9. 66 yrs in 2012 – 13 to 10. 67 yrs in 2017 – 18 ( chart 4 ). the average tenor of annual issuance during the last five years has been high at around 15 years. what are implications of this changing maturity structure of g - secs for the duration of bank investment portfolios? the investment portfolio of banks is classified under three categories, viz., ‘ held to maturity ( htm ) ', ‘ available for sale ( afs ) ’ and ‘ held for trading ( hft ) '. banks normally hold securities acquired by them with the intention to hold them up to maturity under htm category. only debt securities are permitted to be held under htm with a few exceptions, e. g., equity held in subsidiaries. holding securities under htm provides cushion for banks from valuation changes. however, holding in htm book is subjected to a ceiling. afs and hft categories together form the trading book of banks. banks are permitted to decide on the extent of holdings under afs and hft based on their trading strategy, risk appetite, capital position, etc. securities held under both these books are required to be marked to market. hft book is required to be marked to market on a more frequent basis than afs. valuation frequency of investment is typically a determinant in the composition of investment book of banks. correspondingly, shares of htm, afs and hft are 55. 4 %, 42. 5 % and 2. 1 %, respectively, as on september 2017 ( financial stability report, rbi, december 2017 ). the average modified duration of the afs book of banks is currently around 2. 9 years. the comparable figure for psbs is higher at 3. 5 years and for pvtsbs is at 2. 0 years. with relatively high duration and concentration of g - secs in investment portfolio, bank earnings and capital remain exposed to adverse yield moves, especially as the share of investment income has been