have been reduced. 9 it appears that the short - term trade - off between inflation and unemployment has changed in norway as well. 10 whereas a given rise in unemployment resulted in a relatively small reduction in inflation in the 1970s and 1980s, the gain in the form of lower inflation was far greater in the 1990s. this may be due to a more successful monetary policy and supply - side conditions in the economy, including wage determination. inflation targeting has proved to be a sound system and may be particularly well suited for small and medium - sized open economies. a topic currently being discussed by academia and central banks is whether and how monetary policy should contribute to stability in the financial system. price stability and financial stability often require the same medicine. for example, periods of strong growth in demand for goods and services will usually result in both higher inflation and increased asset prices. both considerations may imply a tighter monetary policy. there are also examples of situations where these objectives must be weighed against one another. in recent years, inflation has been low and stable in many countries while asset prices have risen sharply. there may be several reasons for this. first, a credible monetary policy will result in expectations of low inflation. long - term implicit and explicit price and wage contracts based on low inflation in the period ahead may thus become more common. this would mean that it could take longer for increased demand to translate into higher inflation. asset prices will not necessarily be constrained by expectations and may on the contrary react quickly to changes in the activity level. second, periods of higher productivity growth may lay the basis for high corporate earnings, heightened optimism and reduced risk awareness. productivity growth may also result in low inflation. banks usually have low losses and solid profits and can increase lending without eroding their capital adequacy. debt - financed investments may lead to a faster rise in house and property prices. increased globalisation and changes in trading patterns may have similar effects. there seems to be broad agreement that extreme events that can threaten financial stability should be met with a resolute monetary policy response. for example, a number of countries initiated measures to ensure liquidity in the financial system after the terrorist attacks on 11 september 2001. this reduced the risk in the financial systems. there is less agreement, however, about how central banks should respond to financial imbalances that accumulate gradually. one view is that it is neither possible nor desirable to counter financial imbalances with an active monetary policy. according to this view, it is impossible to determine

so far been resilient to the impact of the policy changes - increasing domestic and foreign competition following the de - reservation and import liberalisation of items as well as the relatively high interest rates - and has withstood the general deceleration in the industrial sector during 1997 - 98 to 2002 - 03. it has been well recognised that the investment limit of rs. 10 million for the remaining ssi units leaves little scope for such producers to achieve economies of scale and scope and become competitive. today, it is, in fact, incentive - compatible for ssi units to remain deliberately small - by fragmenting production - in order to avail of fiscal benefits and to stay outside the purview of labour laws. the pace of de - reservation of ssi items, therefore, needs to be accelerated so as to ensure that size does not remain a constraint to higher production, cost - efficiency and technological upgradation. let me now focus on the major problems / challenges faced by the ssi sector which are enumerated as under : collateral the limit for collateral free loans to tiny sector is rs. 0. 5million and that for other ssi units was rs. 0. 1 million. this limit has since been raised to rs. 0. 5 million for other ssi units also. many small - scale entrepreneurs are facing difficulties in providing collateral security as per the requirements of the financing banks. the limit of 0. 5 million has been further increased to rs. 1. 5 million in respect of ssi units with good track record and financial position. the problem is addressed to a certain extent with the introduction of the credit guarantee fund trust scheme under which collateral free loans up to a limit of rs. 2. 5 million are guaranteed. cost of loans the high cost of borrowings was a major constraint affecting the growth of the sector. the bank rate changes by the rbi combined with crr and repo rate charges have emerged as signalling devices for interest rate changes. the reduction in bank rate announced in the last monetary and credit policy or outside the policy from time to time has resulted in a consequential reduction in the lending rates. banks have now the flexibility to offer lending rates on a fixed rate or on a floating rate. the reduction in interest rates and the offer of floating rates will help the ssi units to procure funds at lower costs than what was prevailing in earlier years. delayed payments considerable delay in settlement of dues / payment of bills by the large -