signs of moderation were coming through the production estimates and feedback from industry. i want to put particular emphasis on food price dynamics, as i believe that this is likely to be a significant factor in the medium term. although the overall contribution of food to inflation moderated over the past year, there are structural demand - supply imbalances at work, which will keep the pressure up in the absence of large and sustainable increases in supply. this phenomenon is demonstrated in the graph in chart 6. the main point that the graph makes is that the prices of protein sources have deviated sharply from their trend in recent years and show no signs of reverting to it. by contrast, the prices of other foods have also shown periodic deviations from trend, but have generally reverted. this pattern has, of course contributed to high volatility, as the chart also demonstrates. volatility in food prices does have a welfare - reducing impact, but in the current indian context, the much greater concern is the long - term nutritional impact of elevated protein prices. at a time when the combined impact of demographic transition and income increases is generating enormous demand for proteins, the supply chain is clearly struggling to meet this demand. to conclude this part of the discussion, let me bring in the issue of inflationary expectations. the persistence and recent acceleration of inflation has clearly increased the risk of expectations becoming unanchored. the rbi monitors short - term expectations through household surveys. recent surveys have reinforced the perception that household expectations are moving up. food prices play an important role in this process, but whatever the causes, the impact on wage - setting in both explicit and implicit contracts cannot be dismissed. however, the relative stability of long - term ( 10 - year ) yields on government securities suggest that expectations over this horizon remain anchored. this is reinforced by our regular surveys of professional forecasters, which also indicate no loss of confidence in a moderate inflation scenario over the medium and long run. v. monetary policy : actions and transmission the current cycle of contractionary monetary policy was initiated in the context of two important factors. first, there was an enormous volume of liquidity in the domestic financial system, as a result of policy responses to the crisis, which also took policy rates to very low levels. second, even as the early signs of recovery were visible, inflationary tendencies had also begun to show. all this was happening in a global environment which was still quite turbulent and uncertain in late 2009 and early 2010. chart 7

recent weeks, there has been a reversal in long positions, which in turn is associated with softening of prices. if this trend persists, it will provide substantial relief for global inflation management, particularly for large commodity importers, including india. further, although hardly a desirable way to control inflation, slowing global growth, in addition to reinforcing these favourable commodity price trends, will also help to moderate demand and keep capacity utilization low. this will contribute to moderating inflationary pressures coming from traded or tradable goods. iii. domestic growth prospects 2010 – 11 was a year in which the economy continued its recovery from the impact of the financial crisis. growth bottomed out at 6. 8 per cent in 2008 – 09, the crisis year, picked up to bis central bankers ’ speeches 8 per cent in 2009 – 10 and further to 8. 5 per cent in 2010 – 11. chart 3 shows two pictures of the growth trajectory. with reference to aggregate and sectoral gross domestic product ( gdp ) estimates, the trajectory in the graph suggests that the momentum is moderating somewhat, as the most recent quarters show decelerating year - on - year growth rates. the main contributor to this tendency is the industrial sector, which has shown relatively high volatility over the period displayed. it slowed significantly during the crisis, recovered sharply subsequently and has recently begun to slow down. looking at the industrial sector a little more closely, the graph displaying trends in industrial production provide some clues to its dynamics. the most volatile segments of the index, both of which are displayed on the graph, are capital goods and consumer durables. these are generally seen as being the most interest - sensitive components of the index and their recent trends suggest that the impact of contractionary monetary policy is having an impact. along with softening commodity prices, this trend will contribute to bringing inflation under control, by helping moderate demand pressures. of course, industry associations, including confederation of indian industry ( cii ), have been consistent critics of the monetary policy stance, arguing that it is slowing growth without really impacting inflation, which is being driven by supply side pressures. i will address this critique both in the discussion on inflation and the one on communication. in short, the domestic growth scenario suggests that the growth rate will moderate somewhat in the coming year. the reserve bank of india projects growth during 2011 – 12 to be 8 per cent in its baseline scenario. from the inflation management perspective, this is not an entirely undes