. as long as the growth in supply keeps pace or even exceeds the growth in demand, inflationary pressures do not sustain. supply can be expanded by enhancing domestic capacity, which the indian economy has clearly done, or by tapping into global sources, which the significant liberalization in trade policy, particularly since the early 1990s, also enabled. however, while this combination of domestic and global supply responses has helped to steadily bring the inflation rate down, the indian economy has always been vulnerable to inflation shocks, which have caused uncomfortable spurts in prices across the board. slide 9 identifies some major shocks to the system, all of which required strong policy responses. as is evident from the graph, the vulnerability of the indian economy to supply shocks on the food and energy fronts is persistent. there have also been periods in which a significant fiscal expansion accompanied by an accommodating monetary stance – i. e., demand - side pressures – raised the inflation rate significantly. sharp depreciation of the rupee in the midst of an oil shock has also played a role on one occasion. while the demand driven inflation shocks can be avoided by prudent monetary and fiscal policies, the vulnerability to supply shocks in the form of a failed monsoon or a surge in oil prices will obviously remain. slides 10 – 12 display some of the characteristics of the transformation of the inflation scenario in india. on slide 10, we see how the relative contributions to inflation have changed over the decades. food has been a steady source of inflation over the entire period. energy became a significant factor during the 1970s, following the first oil shock of 1973. it has persisted in its contribution since then. adding up the two provides the overall contribution of supply - side factors, which, as the graph suggests, have persisted in one form or another through the entire period. looking ahead, it would be reasonable to argue that these pressures are likely to persist, as a result of both global and domestic imbalances between demand and supply. on the energy front, one of the fundamental drivers of high oil prices is increasing demand in emerging market economies, whose rising affluence is resulting in very rapid growth of energy - intensive activities. as relatively low - cost reserves of fossil fuels are exhausted, rising global demand is being met by exploiting higher cost sources. the cost differential between petroleum and alternative sources makes such sources viable even at their relatively high costs. steadily rising costs of production, in turn, exert inflationary pressures on the global economy,

. genuine markets for both products and credit emerged after the reforms of the early 1990s. as slide 13 shows, the persistent inflationary conditions during the 1990s were responded to by significant monetary actions in terms of both rates and liquidity management. as the inflation rate trended lower, a process to which the monetary policy actions of the period contributed, the policy stance in turn changed to accommodate the new circumstances. in other words, monetary policy has been aimed at keeping inflation under control, which involves tightening when inflation exceeds the comfort level and loosening when it falls below. concluding remarks the current inflation scenario is a cause of concern, as the inflation rate persists well above the upper bound of the comfort zone. the fact that these inflationary pressures emerged rather quickly in a situation in which the economy was just beginning to recover from the significant slowdown of 2008 – 09 made the policy challenge more complicated. the monetary policy response to these pressures has been a calibrated one, seeking a balance between sustaining the recovery and reining in inflation, while being mindful of the risks that still remain in the global environment. recent data suggest that the approach is working, with the economy set to grow at a reasonably healthy rate during the current year and the inflation rate beginning to decline, including, significantly, in the manufacturing sector, where inflation is seen as being most responsive to monetary actions. this approach must be viewed in the context of a long - standing policy commitment to maintain a balance between growth and inflation in the short run, while fostering faster growth with lower inflation over long periods of time. the growth pattern of the indian economy over the past six decades clearly shows that accelerating growth has been accompanied by declining inflation. this is primarily because growth has been driven by expanding capacities across the board as well as, in recent years, by increasing global linkages. both these factors have helped to achieve a strong supply response to growing demand, thus keeping inflation in check. this is not to say that the indian economy is now invulnerable to inflation shocks. food and energy price shocks have been a regular part of the economic landscape and may continue to be so in the future. food prices, in particular, are now being driven by some structural imbalances between demand and supply, as increasingly affluent consumers diversify their dietary patterns away from cereals and towards protein sources. this calls for an effort to quickly increase the availability of these items, on which is contingent the longer term outlook for food price inflation. however