improved policy framework, robust external reserves and resilient banking systems. yet the crisis affected virtually all emes, denting the credibility of the decoupling hypothesis. eme central banks found that transparently communicating why and how they were affected by the crisis, notwithstanding the decoupling hypothesis, actually helped assuage concerns and revive market confidence. 58. in the post - crisis period, the major way in which eme central banks have used communication is in giving forward guidance on monetary policy. 59. in the reserve bank too, we have started the practice of giving forward guidance on monetary policy. because of its potential impact, we pay much more attention to the language and nuancing of the “ forward guidance ” paragraphs than other parts of the statement. our experience in this regard has been quite positive. nevertheless, we face some challenges. let me give you a flavor of that. 60. forward guidance is always conditional. the dilemma then is how precisely the conditionality is to be communicated, and how to ensure that the market does not ignore the conditionality and interpret the guidance as an irrevocable commitment. conversely, how does the central bank ensure that it does not become hostage to its guidance? 61. also, the more uncertain the situation, the greater the need for guidance. but also, the more uncertain the situation, the more difficult it is to give definitive guidance. for example, when the forward outlook is uncertain, we are not able to precisely define the conditions under which the guidance holds and the conditions under which we may have to deviate from it. when we are not forthcoming on specifying the conditions, the market starts speculating on them, thereby raising the “ noise ” to message ratio. 62. despite these challenges, in the reserve bank, our experience with greater openness has been quite positive. we found that effective communication can be a powerful tool provided the central bank has credibility. 63. as their financial sectors get deeper and more sophisticated, eme central banks can usefully leverage on communication to enhance their policy effectiveness. to do so however, they have to improve their policy credibility as well as capacity levels. conclusion 64. central banks and central bankers have been at the heart of the global financial crisis. they have been blamed for policies and actions that got the world into the crisis ; they have also been praised for leading from the front in getting the world out of the crisis. i believe this is fair critique – central banks have been a

##ia. 33. the trend since the mid - 1990s has been for a growing number of countries to adopt fiscal rules placing limits on deficits and / or debt, and also prohibiting primary financing of debt by the central banks. one of the broad outcomes of this effort has been that central banks found themselves able to conduct monetary policy free of fiscal compulsions and in a predictable fiscal framework. 34. that happy state of affairs ended in the aftermath of the crisis, and fears about fiscal dominance of monetary policy have resurfaced. monetary and fiscal policies in india 35. as in many economies, in india too, monetary policy was dominated by fiscal considerations during the 1970s and the 1980s. large and growing fiscal deficits ended up being financed by the reserve bank which ultimately resulted in inflation. following the global trend, we too put in place a fiscal responsibility legislation – the fiscal responsibility and budget management ( frbm ) act, 2003 – with ceilings on deficit and debt ratios and provisions prohibiting primary financing of government debt by the central bank. the government ’ s commitment to the frbm mandate during 2003 – 08 afforded the reserve bank the necessary space to implement monetary policy aimed at low and stable inflation. 36. like elsewhere in the world, both monetary and fiscal policies were eased in india too in response to the crisis. in particular, this meant interrupting the fiscal consolidation process enjoined by the frbm act. however, even as the crisis started unwinding and inflation rose sharply to double - digits, the government persisted with an expansionary fiscal stance. 37. by far the biggest concern stemming from the large fiscal deficit, especially from the reserve bank ’ s perspective, is that it adds to aggregate demand and thereby to inflation pressures. by crowding out the private sector, the fiscal deficit could also inhibit, if not impair, monetary policy transmission to the private sector. credible fiscal consolidation is, therefore, a necessary pre - condition for stabilizing inflation and securing non - inflationary growth. 38. over the last one year, the government embraced fiscal consolidation with commendable resolve. the fiscal deficit for the last fiscal year ( 2012 / 13 ), at 4. 9 per cent of gdp, was better than earlier projected and it clearly enhanced the credibility of the government ’ s current year ( 2013 / 14 ) fiscal deficit target of 4. 8 per cent of gdp. 39. economies will be best served if governments ensure that their central banks are able to conduct monetary policy independently and free of