as well as the gap between the actual real interest rate and the natural rate ( r - star ), all at the same time to obtain an optimal outcome ”. 13 the problem is that r - star or any of the other stars in that formulation are fundamentally unobservable. formal efforts to estimate the value of r - star14 have been refined over the years in terms of estimation approaches as well as by accounting for structural changes and country - specific features. it is widely believed that historically, r - star has declined, especially in advanced economies, due to factors like aging populations, lower productivity growth, and excess global savings. more recently, however, 12 wicksell, k. ( 1936 ). interest and prices. ludwig von mises institute. 13 woodford, m. ( 2003 ). interest and prices : foundations of a theory of monetary policy, princeton university press. 14 laubach, t. and williams, john c. ( 2003 ). measuring the natural rate of interest. review of economics and statistics, november, vol. 85, no. 4, pp. 1063 - 1070. the view gaining ground is that post - pandemic dynamics – in particular, overlapping shocks - have reversed some of these trends. this is observed, for instance, in the real time measure of r - star released by the new york fed on its website15. a better understanding of the reasons behind the post - pandemic reversal and this recent disconnect from history will be useful for monetary policy setting in an uncertain future. global economic conditions add complexity to an accurate assessment of r - star. advanced economies face sluggish growth amidst changing labour market dynamics, stubborn services inflation, and fiscal policy uncertainties, all of which could be imparting upsides to r - star. emerging and developing economies may be experiencing upward pressure on their r - stars due to stronger economic activity and investment as well as productivity differentials. they, however, face challenges from geoeconomic fragmentation and geo - political uncertainty as well as global supply chain disruptions and financial market volatility. central banks across the globe are therefore, reassessing how these global factors could be driving shifts in r - star to ensure that monetary policy remains effective in an interconnected world. 15 https : / / www. newyorkfed. org / research / policy / rstar iv. consumption patterns and their economic impact the rapid progress in information and communication technology ( ict ) is contributing

. 5 per cent in april - november 2021. stabilising farm incomes and food availability through the pandemic via transfers of both cash and kind has been a key policy mission. coincidentally, financial inclusion appears to have gone up, with the level of the rbi ’ s financial inclusion index rising from 49. 9 in march 2019 to 53. 1 in march 2020 and further to 53. 9 in march 2021. the evidence is still forming and strong conclusions from its analysis may be premature, but india ’ s monetary policy is by design financially inclusive and it will reap the benefits of this strategy in the future in terms of effectiveness and welfare maximisation. iii. stabilising output - inflation variability as i mentioned earlier, the responsibility assigned to monetary policy is to keep output close to or at its potential and inflation aligned to its target. financially included consumers are able to smooth consumption in the face of shocks because of their access to savings ( deposits ) and credit from the formal financial system in the event of income losses. on the other hand, financially excluded consumers are not able to do so and hence they are vulnerable to higher volatility in consumption spending and output. an economy with all consumers financially included would expect to experience less output volatility due to lower consumption volatility. in an economy with financially excluded consumers, monetary policy has to assign a greater weight to stabilising output. overarchingly, however, it is inflation volatility that affects all consumers, whether included or excluded. therefore, minimising inflation volatility should be the predominant objective of monetary policy in its welfare maximising role. it follows that the larger the share of financially excluded people in an economy, the more the central bank has to pay attention to output stabilisation at the cost of focusing on inflation stabilisation. as financial inclusion rises, monetary policy can hone its ability to stabilise inflation and reap welfare gains for society at large. in india, the issue of financial inclusion and its role in shaping the monetary policy reaction function was recognised from the very outset while instituting the flexible inflation targeting framework. accordingly, price stability was assigned primacy among the goals of monetary policy, with output being a secondary objective to turn to only after price stability as defined numerically in terms of 4 per cent with a tolerance band of + / - 2 per cent around it has been achieved. to quote from the rbi act as amended in 2016 : “ the primary objective of monetary policy