the problem in india is not of deficit, but of excess. ours is a tale of many indices. they include the wholesale price index ( wpi ) ; three legacy measures of cpi inflation, viz., cpi ( industrial workers ), cpi ( agricultural labour ) and cpi ( rural labour ) ; and the new cpis, viz., cpi ( urban ), cpi ( rural ) and cpi - combined. 6. what should be the preferred measure for calibrating monetary policy in the indian context? the traditional practice in the reserve bank has been to use wpi as the headline measure of inflation. the primary reason for this is that the legacy cpis were not representative enough for the entire population. further, in india, wpi has been more extensively researched by way of its empirical relationship with other relevant variables such as output, monetary aggregates and interest rates therefore, presents richer analytical insights. i must add though that even as we use wpi as the headline measure of inflation, we also study the trends in cpi inflation and the findings of household inflation expectation surveys for calibrating our monetary policy. 7. several analysts have argued that the use of wpi inflation by the reserve bank is flawed on the ground that in india, the wpi proxies producers ’ prices rather than consumer bis central bankers ’ speeches prices. moreover, it is contended that wpi does not adequately capture the movement in the prices of services, which constitute close to 2 / 3rd of our economic activity. 8. the inflation dynamics that wpi and cpi project are quite different. this results in considerable divergence between the cpi and wpi, at least in the short term. for example, wpi based inflation was significantly higher than inflation based on the cpis during 2003 – 05. subsequently, till june 2008, inflation based on cpis was much higher than that of wpi. the gap between wpi and cpi narrowed thereafter but has widened again in the recent period. while wpi is currently below 6 per cent, cpi is near double digits. in the long run, however, rbi ’ s in - house research suggests that the gap between wpi and cpi tends to narrow. 9. to some extent, the divergence between wpi and cpi can be attributed to statistical differences stemming from coverage, classification of items and the relative weights of their constituents. however, there could be other reasons for this as well. for example, higher transaction costs, taxes, etc. are reflected in

, which holds back growth and new lending, even while dampening bank incentives to cut base rates. the short term macroeconomic priorities of the reserve bank are therefore clear : • help growth by bringing down inflation in line with the proposed glide path, thus creating room for monetary easing ; and • work with the government and banks on speeding up the resolution of distressed projects and cleaning up bank balance sheets. let me start first with inflation : i am sure many of you are interested in what we will do next on policy. for that, i think the best summary is still our last policy statement, from which i quote, “ significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible federal reserve actions. as the reserve bank awaits greater transmission of its frontloaded past actions, it will monitor developments for emerging room for more accommodation. ” having said all i want to say on future policy, let me explain what we have been doing so far, and why we have been doing it. bis central bankers ’ speeches inflation and growth despite india ’ s known antipathy towards inflation, we have experienced an average of more than 9 percent inflation between 2006 and 2013. the longer we had high inflation, the more the public ’ s expectations of inflation became entrenched at high numbers. because the public ’ s inflation expectations are adaptive – meaning they change only after they see a sustained change in realized inflation – we required a long period of low inflation before expectations came down. unfortunately, our past focus on wpi inflation, which puts weight on internationally traded goods like commodities rather than domestic non - traded goods like education and healthcare, meant that whenever international inflation came down, the clamour for rate cuts increased. so we often did not take the fight to domestic sources of inflation. put in technical terms, the real policy rate was below the neutral real rate for years, and coincided with a pick - up in cpi inflation. the strong disinflation, even deflation, in the world in the last few years gives us a golden opportunity to change. what better time than the current for an inflation prone country like india to bring its inflation finally in line with the world ’ s? with commodity prices declining and astute food management by the government, part of our work is done for us, without india having to undergo the kind of extreme demand compression that was seen in the volcker disinflation. indeed