y v reddy : select aspects of the indian economy address by dr y v reddy, governor of the reserve bank of india, at the bank of japan, tokyo, 27 may 2007. * * * governor fukui and friends, i am honoured by the kind invitation of governor fukui to visit your esteemed bank. we, in the reserve bank of india ( rbi ), deeply appreciate the gesture. governor toshihiko fukui is highly respected in various central banks ’ fora for his depth of knowledge, wisdom and very transparent expositions on the economy of japan and the bank of japan ’ s policies. we look forward to governor fukui's acceptance of our invitation to him to visit the reserve bank and give us the benefit of his address. at the outset, i would like to recall and record that, in july 1991, the bank of japan ( boj ) had provided a credit facility of us $ 195 million to india against the collateral of gold, which was also fully settled by us during september - november 1991. the timely gesture enabled india to maintain its impeccable reputation of unfailingly discharging its external obligations, and proceed with the program of stabilisation as well as reforms. in fact, that period has been a defining moment in our economic history and separates the pre - reform period from the post - reform period, the latter ushering in an era of high growth and stability. the boj and the rbi have had, in the past, several instances of mutually beneficial and productive interaction. for example, in june 1968, the then governor of rbi, had requested the bank of japan to depute an expert to study the export credit problems in india and suggest improvements in the system. the japanese consultant, mr. yoshiaka toda of boj, identified several gaps and weaknesses in our system, and made several recommendations. in true japanese tradition, mr. toda ’ s final evaluation was that " the indian export credit system was one of the best conceived by central banks in the world ". introduction to the rbi the rbi was established under the reserve bank of india act, 1934 on april 1, 1935 as a private shareholders'bank but since its nationalisation in 1949, is fully owned by the government of india. the preamble of the rbi describes the basic functions as “ to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in india and generally, to operate

over the past two decades has contributed to making production more efficient and raising productivity, which in turn has had a subduing effect on price trends. the question of how globalisation and structural changes may affect the future path of inflation will probably attract increasing attention in central bank circles. if, on the one hand globalisation and new technology have led to economies having a lower inflation propensity, it may be possible to achieve a higher level of resource utilisation without inflation accelerating. potential growth will then be at a higher level. on the other hand, increased demand from countries such as china and india combined with a synchronised economic upturn could contribute to the global output gap being closed more rapidly than we at present assume. in this case, inflation could rise earlier than anticipated. the major question is, of course, whether the low international price pressure will endure, and, if so, how long. one factor indicating that the developments we see now are a more lasting phenomenon is the combination of more independent central banks with inflation - targeting and increased global competition. in addition, rapidly - growing low - wage countries like india and china still have some way to go before they are completely integrated into the global economy. events that could radically alter the picture are, for instance, increased protectionism and introversion, extensive armed conflicts and irresponsible fiscal policy. protectionism may lie close to hand as a response to increasingly troublesome competition and difficulties in adapting national labour markets and production patterns, which is indicated, for instance, by the present us debate prior to the presidential elections. however, there is little that now indicates that these factors could grow sufficiently to outweigh the trend towards increased integration and globalisation. the conclusion is therefore that the low - inflation economy appears to have become established, although we cannot take it for granted. what consequences will this have for monetary policy in the future? monetary policy in a low - inflation economy the target for monetary policy is price stability. this means that the riksbank is as anxious that inflation should not be too low as that it should not be too high. in sweden, the annual cpi inflation rate was negative in february, for the first time since the beginning of 1999. is there a risk of this development continuing, and what can the riksbank do if it does? to begin with, it is important to distinguish between whether price trends are governed by developments on the demand side or on the supply side. a period of falling