we can because of the length of time it takes for monetary policy changes to have their full effect. our task would be far less challenging if we could predict the future with great confidence. the point i want to emphasise is that monetary policy is in the end an art rather than a precise science, no matter how much science we try to bring to bear on the process. but in looking ahead each member of the mpc has to try to distinguish between what we actually know, what we think is the most likely outcome, and what we fear could happen - we cannot simply act on a hunch. we then have to watch the evolving situation measured against our central expectation for signs that prospective inflationary pressures are proving to be either weaker or stronger than we had, individually, anticipated, adjusting our policy view accordingly. given the uncertainties, it should not surprise you that the committee members disagree more often than not, but usually at the margin, on what should happen in any particular month to interest rates. i regard that as a strength rather than a weakness of the process. it should not surprise you either that even though we consistently aim to hit the target, we rarely achieve it precisely. as a matter of fact, i have been genuinely, and agreeably, surprised that the outcome over the past few years has been as consistently close to the target as it has been. the best we can realistically hope for is that we come close on average and over time. and to achieve that, when we identify developments which are likely to move us away from our target on one side or the other, we must be ready symmetrically to adjust our policy to bring us back on track. that is why, even though the economy as a whole continues to perform relatively well on the data, we have moved interest rates downwards this year, to reflect the emergence of the new downside risks ; and it is also why we indicated, in our recent press release, that we will continue to monitor those downside risks. that is not a promise of further interest rate reductions, but it is a promise that we are prepared to move further if we have evidence that those risks are increasing. given our starting point, with inflation somewhat below target and expected to remain so for a while, we are relatively well placed to weather the storm if it begins to blow more strongly.

was very important • chakravyuh in mahabharata : getting in was easy. getting out was difficult. 18. post - crisis : applying judgement in treading the growth - inflation balance : if we alter interest rates, what impact will it have on inflation? on growth? transmission. criticism of rbi. 19. example 2 : deposit insurance 20. • during the crisis – uk banks insured all their deposits • pressure on us to do the same • can we afford it? will it not set off a panic? example 3 : costs and benefits to regulation • tighter regulations – safe financial system but also a dysfunctional financial system. • excessive or premature tightening can mean loss of growth and welfare. • excessively loose regulation can result in financial instability. • drawing the right balance requires fine judgement. • ability to make the right judgment is a key attribute of a knowledge institution. bis central bankers ’ speeches 21. 2nd attribute : ability to make intelligent, mature and balanced judgment. 22. 3rd attribute : be open minded. no dogma. galileo and the church 23. • by far the most famous and high profile example of dogma in the history of science is the conflict between galileo and the church. • church refused to accept the heliocentric view of the universe against the prevailing geocentric view of the universe. • no dogma means when new evidence that invalidates prevailing view comes in, we are willing to change our view and accept the new proposition ( thomas kuhn – paradigm shift ). • galileo himself was not fully correct because he believed in a stationary sun. example : corporates into the banking sector why are you allowing corporates into the banking sector? • true, they have not been allowed so far. • true, rules in this regard around the world are different. • after extensive consultation, due deliberation and careful consideration, we have decided to allow corporates into the banking sector • why? • – corporates have been allowed entry into other financial service sectors – corporates have a long and credible record of building and nurturing new businesses in highly regulated sectors like telecom, power, airports. – corporates can bring in capital, leverage on their business experience and management expertise – innovative ideas for financial inclusion arguments against – scope for connected lending, using public trust for private gain – opportunities for regulatory arbitrage and for contagion of risk across the financial system – concentration of economic power and influence • safeguards ( endogenous and exogen