us dollar clawed back lost ground with the announcement of fed balance sheet normalisation and tensions around north korea. capital outflows from eme equity markets gathered pace. for india, an improvement in external sector viability occurred despite these global developments. generally buoyant capital inflows buffered up the foreign exchange reserves. what would challenge the mpc throughout the year was the domestic dilemma – the trade - off between inflation and growth was set to become sharp and the tension between the two so acute that it would eventually impact the voting pattern of the mpc. shortly, i am going to focus exclusively on the trials and tribulations facing the mpc in this crucial balancing act ; for a moment, however, let me introspect on the rbi. 4 / 8 bis central bankers'speeches at the time of the mpc ’ s first meeting a year ago, the rbi itself was caught up in the throes of leadership change – the twenty - fourth governor had just assumed office ; the deputy governor responsible for monetary policy had not yet been appointed, and the senior - most deputy governor had to step in to complete the six - member mpc. also, the rbi had been working with the convivial guidance of a technical advisory committee since 2005. the more formal processes associated with an mpc had to be literally tailored from the cross - country experience to adapt to the country - specifics. what emerged was quite a unique sequence of institutional procedures informed heavily by internal management information systems. as the mpc set about its first meeting, the accommodative cycle of monetary policy in india that commenced in january 2015 was maturing, with the policy rate having been reduced by a cumulative 150 basis points already. yet, the ground underneath was moving. macroeconomic and liquidity conditions were about to undergo tectonic shifts. the combination of a stronger than usual seasonal spike in vegetable prices, highly elevated pulses prices and international crude prices firming up from a recent trough, veered inflation up from its projected path during april - july 2016, even as growth slowed. in the august cpi reading – which was the first print that became available to the mpc – a glimpse of the forming vortex was revealed. with a suddenness that overturned the april - july surge, inflation fell off a cliff as the prices of vegetables and pulses sank into deflation! in these challenging circumstances, the mpc prognosticated inflation developments as “ … a downward shift in the momentum of

##lier, decelerating just when industrial production the world over is on the mend. transient disruptions associated with the gst rollout are likely operating as a drag. nonetheless, it is fair to say that the nation is impatient to see a revival in industry, especially as capital formation staged a modest recovery. sharpening the dilemma for the mpc, retail inflation rose nearly 200 basis points since its last meeting. the upturn was broad - based, provoking households to expect that the general level of prices would increase by more than the current rate in the months ahead. input costs facing both farms and firms rose, but weak pricing power in conditions of subdued demand prevented a fuller - blown pass - through into retail inflation. in the mpc ’ s assessment, inflation will likely rise from current levels in the rest of the year, with farm loan waivers and the implementations of pay and allowance revisions by states a la the centre posing upside risks. the mpc also pensively expressed concern about the spectres of geopolitical tensions and imminent normalisation of systemic central bank balance sheets that loomed over the outlook. on food inflation, the mpc ’ s prognosis was more sanguine though, with adequate foodstocks and supply management efforts seen as mitigating factors. on growth, the mpc regarded the first estimates of kharif production – which were lower than last year ’ s level and the target for this year – and the gst rollout as early but transitory setbacks. it believed that agricultural activity will improve from here on. furthermore, it found business optimism expressed by firms about prospects for the october - december quarter reassuring. relative to its august assessment, the mpc lowered its growth forecast by 60 basis points which, in a rough and ready sense, measures the net lagged impact of shocks such as demonetisation and the gst. the mpc expressed the view that recent structural reforms would support growth over the medium - term. accordingly, it expected upsides to the growth forecast from the resolution of gst - related impediments and from the pay and allowance revision for state government employees, while the hardening of input costs and the loss of consumer confidence would 7 / 8 bis central bankers'speeches balance the risks. the mpc was particularly candid in drawing out the bottom line : “ … it is imperative to reinvigorate investment activity. ” for this, creation of a conducive environment for investment is critical