all the people some of the time ”, bursts of inflation can generate growth for some time. thus in the short run, the argument goes, higher inflation leads to higher growth. but as the public gets used to the higher level of inflation, the only way to fool the public again is to generate yet higher inflation. the result is an inflationary spiral which creates tremendous costs for the public. therefore, economists have argued – and a number of nobel prizes have been given for the ideas contained in the previous paragraphs – that the best way for the central bank to generate growth in the long run is for it to bring down inflation. sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad. and if the public starts expecting that inflation will stay low, the central bank can cut interest rates significantly, thus encouraging demand and growth. indeed, the reason the malaysian central bank can keep rates low today to foster growth is because it has fought the battle against inflation and convinced its citizens that, if need be, it will smote the inflationary beast again if it rears its head. put differently, in order to generate sustainable growth, we have to fight inflation first. let me also add that greater public faith that inflation will be low will add stability to our currency, and bis central bankers ’ speeches prevent the kind of gyrations we saw last summer. exchange rate stability is centrally in business interests. if we have to bring down inflation, we have to start today. we cannot wait till the public ’ s expectations of inflation get more entrenched, and the inflationary spiral gains momentum. this is why we have raised interest rates 3 times since september. but what about industrialists who tell us to cut rates? i have yet to meet an industrialist who does not want lower rates, whatever the level of rates. but will a lower policy interest rate today give him more incentive to invest? we at the rbi think not. first, we don ’ t believe the primary factor holding back investment today is high interest rates. second, even if we cut rates, we don ’ t believe banks, which are paying higher deposit rates, will cut their lending rates. the reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her. inflation is placing a floor on deposit rates, and thus on lending rates. currently, therefore, we do not believe the policy rate

move out of controls and micro - regulation. as already mentioned, banks are special in emerging markets since they take a leading role in development of other financial intermediaries and of financial markets, apart from having a large recourse to public deposits. no doubt, there is nothing like an ‘ optimal ’ level of governance for one to be satisfied with. the objective should be to continuously strive for excellence. the rbi has, on its part, made significant efforts to improve governance practices in banks, drawing upon international best practices. it is heartening to note that corporate governance presently finds explicit mention in the annual reports of several banks. the improved corporate governance practice would also provide an opportunity to accord greater freedom to the banks ’ boards and move away from micro regulation to macro management. banks in india are custodians of depositors ’ monies, monies of the millions of depositors who are seeking safe avenues for their hard earned savings, and hence, banks must accept and perform an effective fiduciary role. in this light, improvement in policy - framework, regulatory regime, market - perceptions, and indeed, popular sentiments relating to governance in banks need to be on the top of the agenda to serve our society ’ s needs and realities while being in harmony with the global perspective. thank you.