wage increase was of the order of 17 per cent during 2008 – 09 to 2012 – 13 so far. even after adjusting for high rural consumer inflation, real wage increase over 6 per cent per annum was significant ( table 2 ). in the formal sector, company finance data suggest that the wage bis central bankers ’ speeches bill has risen at a faster rate since the middle of 2009 – 10. as wages increase, entitlement goes up, and consequently demand and preference for essential commodities increases. third, with the persistence of near double - digit inflation in 2010 and 2011, the medium - to long - term inflation expectations in the economy have risen, underscoring the role of higher food prices in expectations formation. if inflation is expected to be persistently high, workers bargain for higher nominal wages to protect their real income. this creates a pressure on firms ’ costs and they may in turn increase prices to maintain their profits. independently, the producers ’ own inflation expectations also affect inflation directly by influencing their pricing behaviour. if companies expect general inflation to be higher in the future, they may believe that they can increase their prices without suffering a drop in demand for their output. fourth, there has also been added stimulus from the crisis driven fiscal and monetary policy. fiscal consolidation process was reversed in 2008 – 09 which impacted the macroeconomic conditions ( chart 2 ). higher fiscal expansion also impedes efficacy of monetary policy transmission. the moderation in private demand resulting from anti - inflationary monetary policy stance is partly offset by the fiscal expansion. let me now turn to the role of monetary policy in a little more detail. role of monetary policy the current phase of high inflation followed the global financial crisis, which affected india ’ s economy, though not with the same intensity as advanced countries. india, though initially somewhat insulated from the global developments, was eventually impacted significantly by the global shocks through all the channels – trade, finance and expectations channels. the reserve bank, like most central banks, took a number of conventional and unconventional measures to augment domestic and foreign currency liquidity, and sharply reduced the policy rates. in a span of seven months between october 2008 and april 2009, there was an unprecedented policy activism. for example : ( i ) the repo rate was reduced by 425 basis points to 4. 75 per cent, ( ii ) the reverse repo rate was reduced by 275 basis points to 3. 25 per cent, ( iii ) cash reserve ratio ( crr ) of banks was reduced by a

25 basis points in the last monetary policy review on 29th january 2013. currently the crr stands at a historically low level of 4 per cent of ndtl of banks and policy repo rate is at 7. 75 per cent. bis central bankers ’ speeches conclusion while i have tried to unravel the inflation puzzle and provide some explanation why inflation remained entrenched despite output gap being negative, we know that sustained level of high inflation is bad for the economy as it imposes real costs which are borne disproportionately by the different segments of the economy. in order to bring inflation down on an enduring basis and anchor inflation expectations there is a need for policy action on several fronts. bis central bankers ’ speeches first, it is important to aim for nutritional security not only to harness the demographic dividend stemming from our sizeable young population but also to contain food prices. this will require addressing the supply - demand imbalance in the agricultural sector and modernising the supply chain. second, concerted efforts are required to secure energy security for the country. the bulk of our fossil fuel requirement is met by imports. a necessary step in this direction is market related pricing of petroleum products to economise consumption and reduce the subsidy burden. this should be supplemented by step up in electricity generation so as to minimise fall back option of diesel generation of power. third, in a supply constrained economy, potential output is not a reliable gauge for inflation threshold as firms operate below capacity and yet retain the pricing power. hence, reliability of power supply and availability of necessary industrial raw materials are important for industrial capacity utilisation and improvement in productivity. besides moderating inflation, this will also reduce reliance on imports of products for which domestic capacity exists. fourth, it is imperative to maintain exchange rate stability to cushion transmission of international price pressures in commodities, particularly crude oil. this will require management of the current account in our balance of payments with the rest of the world at sustainable levels. fifth, fiscal consolidation is important for maintaining both domestic and external balance so that we avoid the risks of twin deficits. as our own high growth experience of 2003 – 08 suggests, lower fiscal deficit not only encourages private investment but also helps in maintaining price stability. finally, while persevering with the steps to increase the depth of the financial market and addressing credit constraints, monetary policy needs to be calibrated to the evolving growthinflation dynamics so that we move towards our potential growth in a non -