led to some externally induced cyclical slowdown. however, as the global economy recovers, supply constraints are again expected to be binding. against this backdrop of the unique features of our economy, let me turn to the five concerns that i want to raise. first concern : exit from accommodative monetary policy : growth vs. inflation while there is broad agreement that we need to exit from the present excessively accommodative monetary and fiscal policies, there is less agreement on when and how we should exit. there are incipient signs of recovery. industrial production has picked up in the past couple of months, but export growth remains negative. business confidence surveys suggest recovery from the troughs touched a year ago although the confidence levels remain below the earlier peaks. even as recovery remains weak, consumer price inflation ( cpi ) is running in double digits on the back of high food prices. while the headline wholesale price inflation remains low ( 0. 84 per cent for the week ended september 19, 2009 ) – it was even negative during june - august 2009 – cpi inflation has been persistently high for almost a year. higher food prices in our case are partly a result of the structural demand - supply imbalances. at present, cyclical factors are also at play. monsoon in the current season, which ended on september 30, has been the weakest since 1972. agricultural output is expected to suffer and this could keep upward pressure on food prices in the coming months. high food prices are, therefore, a mix of structural and cyclical factors. while the buffer stock of foodgrains and better supply management could mitigate the adverse effects to an extent, imports are not an easy solution given the requirement. although inflation pressures emanating from higher food prices may limit the scope for monetary policy action, there are implications for inflation expectations. furthermore, unlike the major advanced economies, growth remains positive. real gdp growth was 6. 7 per cent in 2008 - 09 and is expected to be 6. 0 per cent ( with an upward bias ) as per the reserve bank ’ s july 2009 projections. in view of the country specific features, we may need to exit from accommodative monetary policy earlier than advanced economies. this calls for careful management of trade - offs : growth concerns warrant a delayed exist, but inflation concerns call for an earlier exit. an early exit on inflation concerns runs the risk of derailing the fragile growth, while a delayed exit may engender

inflation expectations. second concern : management of large and volatile capital flows major central banks – such as the us fed, the ecb, the boe – have flushed their financial systems with unprecedented amount of liquidity. till the first quarter of 2009, this liquidity was finding its way back to the central banks as excess reserves because of risk aversion. risk appetite is now returning. there are signs of recovery in portfolio investments to the emes. for instance, portfolio investments by fiis in the indian equity market amounted to us $ 13. 6 billion in the period april 1 – september 18, 2009 as against outflows of us $ 5. 2 billion in the corresponding period of 2008 reflecting a turnaround of almost us $ 19 billion. moreover, as noted above, in view of incipient inflationary pressures, policy rates in our case may have to be tightened ahead of those in advanced economies. the resultant larger interest differential may attract larger capital inflows. will capital inflows be modest or turn into a flood as in 2007? the latter concern is particularly relevant in view of abundant liquidity in the major advanced economies. what will the implications be for exchange rates? in india, the current account is in modest deficit ; hence large and volatile capital flows can impose macroeconomic costs. emerging market central banks have three options in managing capital flows. the first option is for the central bank not to intervene in the forex market and let the exchange rate bear the burden of adjustment. will undue exchange rate appreciation not further widen the current account and what will the implications be for future sustainability? will exchange rate appreciation help to contain inflation? these are the questions to address if this option is adopted. second, the central bank can intervene in the forex market, but refrain from sterilisation. such an approach runs the risk of excessive growth in monetary and credit aggregates which can lead to higher inflation as well as credit and investment booms and create financial fragility. the third option is to sterilise the interventions. irrespective of the method of sterilisation, the financial cost of sterilisation in terms of national balance sheet is obviously ultimately borne by the government even though direct costs may be borne by separate agencies. sterilised intervention can exacerbate fiscal pressures, but this needs to be assessed against the benefits of macro - financial stability. third concern : de - clogging monetary transmission mechanism following the collapse of lehman brothers,