. earlier on, we used to set the rate by averaging the mean of the bid / offer rates polled from a few select banks as at 12 noon on every working day. a few months ago we changed the method. now we poll a select list of contributing banks at a randomly chosen five minute window between 11. 45 am and 12. 15 pm and put out the reference rate at 12. 30 pm. the contributing banks are selected on the basis of their market - share in the domestic foreign exchange market and representative character. the reserve bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate remains a true reflection of market activity. ( v ) data interpretation : need to look behind the data 43. information technology has improved data availability. paradoxically, this has also increased the likelihood of misinterpretation of data. in his recent book, thinking, fast and slow, daniel kahneman explains where we can and where we cannot trust our intuition and how we can tap into the benefits of slow thinking. orphanides, a ( 2001 ) : ‘ monetary policy rules based on real - time data ’, american economic review, 91, 964 – 985. bis central bankers ’ speeches 44. consider an example : in a recent financial daily, an analysis based on last quarter operating results of indian companies claims that interest costs were 11. 1 per cent of total revenues, and infers on that basis that a cut in rbi ’ s rate can make a significant difference to the prospects of profits of firms. 4 arithmetically, this is correct and will make the reader believe that high interest costs have adversely impacted profitability. the reader would also intuitively attribute the deceleration in real gdp growth to 6. 5 per cent in 2011 / 12 to the increase in the policy rate of the reserve bank by 375 bps during march 2010 – october 2011. but a closer look at the same sample suggests that the data used for this analysis includes financial and insurance firms which typically have interest to sales ratio of as high as 65 per cent. in contrast, non - financial firms, which account for more than 85 per cent of business, have interest cost of only 2. 7 per cent of sales. therefore, it is necessary to look behind the data and explore what lies underneath. 3f 45. consider another important variable – the real interest rate. research in the reserve bank shows that real interest rate and investment activity are inversely related

bankers ’ speeches economic slow - down, pose significant challenges to the accuracy of economic indicators, including those that are used as source data for the early gdp estimates. during this period, some firms go out of business, some may complete surveys only partially, and some may choose not to respond at all to voluntary surveys. therefore, devising reliable and accurate methodologies for what goes into which account, even with today ’ s technology, is no trivial task, especially for a modern, complex economy. ( iii ) estimation of potential output 38. an accurate estimate of potential output is critically important for central banks to assess demand conditions and the output gap. reliability and timeliness are critical. for example, an output gap measurement mistake led the federal reserve to pursue policies that eventually led to the great inflation of the 1970s. 3 2f 39. potential gdp cannot be directly observed, but has to be estimated using statistical techniques. such an estimate is vulnerable to errors for three main reasons. first and most obviously, real gdp data is often revised – sometimes substantially – after the initial estimates are published. second, there is considerable uncertainty in the level of productivity growth at any point in time. finally, there do not exist widely agreed assumptions or a unique methodology for estimating potential gdp. these reasons get accentuated in the case of india because of lack of comprehensive and consistent data on employment. 40. the uncertainty surrounding economic activity has heightened in the post - crisis period. india is no exception. assessing india ’ s potential growth rate, consistent with our objective of low and stable inflation, remains a challenge. in its annual report for 2009 / 10, the reserve bank had reported that the potential output of the indian economy may have dropped from 8. 5 per cent pre - crisis to 8. 0 per cent post - crisis. latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7. 5 per cent. ( iv ) market reference rates 41. the recent libor controversy has drawn the world ’ s attention to how a few large global financial institutions allegedly manipulated one of the most commonly used market rates. 42. can we have problem similar to libor here in india? the counterpart of libor in india is the less used mibor which is set by fimmda - nse. the reserve bank, on its part, compiles and publishes every day the reference exchange rates for spot usd - inr and spot eur - inr following a transparent statistical method