to lead to a growth crisis. in contrast, khan and senhadji ( 2000 ) estimate that the threshold above which inflation significantly slows growth is 1 – 3 percent for industrial countries and 7 – 11 percent for developing countries. according to easterly and fischer ( 2001 ), “ a growing body of literature on balance - but not unanimously - tends to support the view that inflation is a cruel tax ”. bis central bankers ’ speeches offset that temporary growth. the boom and bust will not be good for the economy, and average growth may be lower than if the cut had not taken place. this is why modern economics also says there is no long run trade - off between growth and inflation – the best way for a central bank to ensure sustainable growth is to keep demand close to potential supply so that inflation remains moderate, and the other factors that drive growth, such as good governance, can take center stage. 4 put differently, when people say “ inflation is low, you can now turn to stimulating growth ”, they really do not understand that these are two sides of the same coin. the rbi always sets the policy rate as low as it can, consistent with meeting its inflation objective. indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply. if a critic believes interest rates are excessively high, he either has to argue the government - set inflation target should be higher than it is today, or that the rbi is excessively pessimistic about the path of future inflation. he cannot have it both ways, want lower inflation as well as lower policy rates. at the same time, the rbi does not focus on inflation to the exclusion of growth. if inflation rises sharply, for instance, because of a sharp rise in the price of oil, it would not be sensible for a central bank to bring inflation within its target band immediately by raising interest rates so high as to kill all economic activity. instead, it makes sense to bring inflation back under control over the medium term, that is, the next two years or so, by raising rates steadily to the point where the bank thinks it would be enough to bring inflation back within the target range. let me emphasize that this is not a prediction of either the path of oil prices or a forecast of our monetary actions, lest i read in the paper tomorrow “ rbi to raise rates ”. more

that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments. for example, if industrialists want significantly lower rates, they have to support efforts to improve loan recovery so that banks and bond markets feel comfortable with low credit spreads. the central and state governments have to continue on the path of fiscal consolidation so that they borrow less and thus spend less on interest payments. households will have to adjust to lower nominal rates, but must recognize that higher real rates make their savings more productive. they will find it worthwhile to save more to finance the enormous investment needs of the country. adjustment is difficult and painful in the short run. we must not get diverted as we build the institutions necessary to secure a low inflation future, especially because we seem to be making headway. the government has taken the momentous step of both setting a cpi based inflation objective for the rbi as well as a framework for setting up an independent data from household surveys also suggest that household financial savings are moving up. for example, two recent financial inclusion surveys for selected states in india – financial inclusion insights survey conducted by intermedia and the finscope survey implemented by the small industries development bank of india ( sidbi ) – suggest that among individuals “ who have a bank account ”, the fraction who saved through bank deposits increased from 60 % in 2013 to 98 % in 2015. of those who “ save money ”, the fraction saving through a bank increased from 67 % in 2013 to 93 % in 2015. of those who “ save money ”, the fraction “ saving at home ” has declined dramatically from 90 % in 2014 to 6 % in 2015. bis central bankers ’ speeches monetary policy committee. in the days ahead, a new governor, as well as the members of the committee will be picked. i am sure they will internalize the frameworks and institutions that have been set up, and should produce a low inflation future for india. the rewards will be many. our currency has been stable as investors have gained confidence in our monetary policy goals, and this stability will only improve as we meet our inflation goals. foreign capital inflows will be more reliable and increase in the longer maturity buckets, including in rupee investments. this will expand the pool of capital available for our banks and corporations. the government will be able to borrow at low rates, and will be able to extend the maturity of its debt. the poor will not suffer disproportionately due to bouts of sharp