slowly. as we saw in the earlier discussion, the domestic inflationary situation was relatively benign during this period. just before the crisis, it rose sharply, driving domestic inflation to high levels, before crashing during the crisis, accompanied by a sharp fall in domestic inflation. although it recovered from that low level quite strongly, it was still below $ 80 per barrel in october 2010. however, from november onwards, on that relatively high base, year - on - year increases of around 30 % have clearly contributed significantly to the acceleration of inflation during the current year. bis central bankers ’ speeches in india ’ s current situation, as shown by the experience of the past few years, high and rising energy prices have a powerful impact on domestic macroeconomic conditions. if they continue to rise, they will have a negative impact on nirg ; in other words, in order to maintain a given rate of inflation, growth may have to slow. chart 2 : crude oil even if they do not rise, high prices in absolute terms will have a bearing on the commercial viability of investments across the board. investment activity may decline, contributing to a further erosion of nirg. this perspective has a straightforward implication for monetary policy. when the economy is at or close to its nirg, an increase in energy prices can trigger inflationary pressures, because there is high capacity utilization and producers can easily pass on higher energy prices to their consumers. a common argument in the current indian policy debate is that since rising energy prices are a supply shock, monetary policy, which acts through its impact on demand, should not respond to this shock. it must be emphasized that this argument has merit only when the supply shock is transitory or temporary in nature. if its impact is likely to fade relatively quickly, a monetary policy response is not required. however, a persistent shock, which takes the prices of critical inputs to new highs and keeps them there, does warrant a monetary policy response. essentially, to go back to the argument made a little earlier, high and rising energy prices may contribute to the lowering of nirg and this needs to be recognized and acted upon, if inflation is not to get out of hand. impact of food prices years of experience have persuaded us that food price inflation is typically a temporary phenomenon, dependent on whether the monsoon has been good or bad. that this is no longer the case has been vividly demonstrated by the record over the past few years, when food price inflation has persisted despite reasonable monsoon performance in some of

subir gokarn : monetary policy – key factors shaping trajectory article by dr subir gokarn, deputy governor of the reserve bank of india, published on www. livemint. com on 22 september 2011. * * * for energy - importing economies such as china and india, monetary policy is going to be influenced by global oil price movements as long as oil remains the predominant incremental source of energy. the core objectives of monetary policy in the future will remain what they have been in the past. the primary objective of monetary policy is a low and stable inflation. in achieving this, the economy has to be allowed to maintain growth at the highest possible rate consistent with a low and stable inflation. however, the context in which these objectives are pursued obviously changes over time. in my view, there are three key factors that are playing an important role in the current indian context. each of them has a bearing on both the monetary stance and the strength of the monetary transmission process. non - inflationary rate of growth ( nirg ) the first critical factor is the maximum rate of growth that the indian economy can generate without provoking inflationary pressures. this notion is a core building block in monetary economics, though it is typically labelled the potential growth rate of the economy. the concept is very simple. if the economy is growing faster than its potential, capacities and resources are stretched. producers and workers find it relatively easy to raise prices and wages in the face of buoyant demand for their goods and services. rising prices across the board then translate into generalized or broad - based inflationary pressures. on the other hand, if the economy is growing below its potential, resources are idle, making it difficult for workers and producers to ask for higher wages or prices. inflation is low and will remain so until the economy reaches its potential growth rate. the challenge for monetary policy, then, is to find and maintain a stance that keeps the economy as close as possible to its potential growth rate. grow any faster and there is a risk of inflation becoming entrenched ; grow any slower and growth is being needlessly sacrificed. do we know what india ’ s nirg is? in the recent past, at what rates of growth have significant inflationary pressures been triggered? looking back over the past two decades ( see chart 1 ), we have three distinct episodes of accelerating inflation following a growth spurt. the first is in the mid - 1990s, when inflation surged during a three -