balancing act. as important as real borrowing rates for the manufacturer are real deposit rates for the saver. in the last decade, savers have experienced negative real rates over extended periods as cpi has exceeded deposit interest rates. this means that whatever interest they get has been more than wiped out by the erosion in their principal ’ s purchasing power due to inflation. savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits. this meant that india needed to borrow from abroad to fund investment, which led to a growing unsustainable current account deficit. in recent years, our fight against inflation also meant the policy rate came down only when we thought depositors could expect a reasonable positive real return on their financial savings. this has helped increase household financial savings relative to their savings in real assets, and helped bring down the current account deficit. at the same time, i do get a lot of heart - rending letters from pensioners complaining about the cut in deposit rates. the truth is they are better off now than in the past, as i tried to explain in a previous lecture, but i can understand why they are upset when they see their interest income diminishing. the bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle. at one of my talks, an industrialist clamored for a 4 % rate on his borrowing. when i asked him if he would deposit at that rate in a safe bank, leave alone invest in one of his risky friends, he said “ no! ” bis central bankers ’ speeches nevertheless, he insisted on our cutting rates significantly. unfortunately, policy makers do not have the luxury of inconsistency. supply constraints food inflation has contributed significantly to cpi inflation, but so has inflation in services like education and healthcare. some argue, rightly, that it is hard for rbi to directly control food demand through monetary policy. then they proceed, incorrectly, to say we should not bother about controlling cpi inflation. the reality is that while it is hard for us to control food demand, especially of essential foods, and only the government can influence food supply through effective management, we can control demand for other, more discretionary, items in the consumption basket through tighter monetary policy. to prevent sustained food inflation from becoming generalized inflation through higher wage increases, we have to reduce inflation in other items. indeed

prolific, especially over the last decade. for the world taken together, the ratio of foreign assets and foreign liabilities to gdp rose from 133 per cent in 1994 to over 300 per cent in 2008. 2 calculations based on imf direction of trade statistics, june 2010. calculations based on imf balance of payments year book, 2010. bis central bankers ’ speeches 15. the impact of globalization of labour was by far more striking. emerging asia added nearly three billion to the world ’ s pool of labour as it integrated with the rest of the world over the last two decades thus hugely improving its comparative advantage. together, the three dimensions of globalization – trade, finance and labour – helped emerging asia multiply by a factor its exports to the advanced economies. the result was large and persistent current account surpluses in the asian economies and corresponding current account deficits in the importing advanced economies. these global imbalances combined with developments in the financial sector to brew the crisis to its explosive dimensions. 16. so, where do we go from here? the g - 20 is now actively engaged in the challenging task of redressing structural imbalances in the global economy. at their pittsburgh summit in september 2009, the g - 20 leaders agreed on a “ framework for strong, sustainable and balanced growth ” and committed to a “ mutual assessment process ” ( map ) which is a peer review of each country ’ s progress towards meeting the shared objectives underlying the framework. recognizing that global imbalances, which had narrowed during the crisis, started widening again in the exit phase, the g - 20 resolved that promoting external sustainability should be the focus of the next stage of the map and entrusted this task to a framework working group ( fwg ). 17. india is privileged in co - chairing, together with canada, the framework working group for managing the task of developing the indicative guidelines for assessing and addressing persistent global imbalances. the success of this initiative is critical for redressing the problem of global imbalances. 18. in moving forward on finding a sustainable solution to global imbalances, we will be guided, individually at the country level and collectively at the g - 20 level, by insights from academic research. it is in this context that work of insightful economists like prof. obstfeld will be important. ladies and gentlemen, please join me in welcoming prof. maurice obstfeld to deliver the 12th l. k. jha memorial lecture. bis central bankers ’ speeches