the bank of canada business outlook survey, " bank of canada review ( autumn 2005 ) : 19 – 25. international monetary fund, world economic outlook ( april 2007 ), 161 – 192. led to lower prices for many manufactured goods and higher prices for many commodities, particularly energy products. while both of these groups are represented in the total consumer price index, many energy prices are excluded from our core measure of inflation because of their volatility. in the pursuit of our 2 per cent target for total cpi, we use our core measure as an operational guide because it has been a good gauge of the underlying trend of inflation and has been a better predictor of future changes in the total index than has total cpi itself. forthcoming research at the bank of canada indicates that this relationship continues to hold in canada, although it has diminished in many other countries. 15 we will continue to monitor the stability of this relationship, and the bank will also continue to look at a range of measures to assess the underlying trend of inflation. considerable judgment must always be applied, and no one measure should be relied on exclusively. second, globalization may affect the degree and speed of the pass - through of exchange rate movements to domestic prices. it is widely believed that globalization acts as a stabilizer that should dampen exchange rate pass - through because the increased competition faced by businesses will lead them to compress their margins to remain competitive and absorb rising costs. 16 eventually, however, local prices should adjust to exchange rate movements, if they persist. we may, in fact, be seeing this effect here in canada, since some retailers in the automotive and book sectors have recently adjusted prices downwards in the face of greater competitive pressures stemming from the rise of the canadian dollar. third, globalization may have a conflicting influence on productivity. i have already mentioned how globalization promotes higher productivity by allowing firms to arrange their production processes in the most cost - effective ways. again, however, the reality in canada is more complex. the large swings in relative prices fed by globalization have sparked a reallocation of resources between sectors and regions. this reallocation can lead to a temporary slowing in productivity growth as the adjustments take place. this is particularly true in the natural resources sector, where investments typically have long lead times, where a substantial amount of labour has been absorbed, and where high commodity prices have encouraged the production of more marginal resources. these effects may be behind a portion of canada's disappointing productivity record in recent years. 17 fourth, the

of the monetary actions listed in the table. first, even while the indian economy has recovered quite rapidly from the slowdown, there is persistent global uncertainty. emes have generally done quite well in coming out of the crisis, but a major part of the global economy – the us, the uk, the euro zone – is not only showing only very modest signs of recovery, it is also manifesting new stresses, partly as a result of the huge build - up of sovereign debt, which governments used to support their various fiscal stimulus packages. over the past few weeks, optimism about a sustained, even is slow, global recovery, has been giving ground to concerns about another imminent slowdown. one thing that we learnt from the events of 2008 – 09 was that india is not immune to global turbulence. be it through trade, capital flows or a general sense of confidence about economic prospects, a global problem quickly becomes a domestic one. given these linkages, the risks from the global economy need to be taken into consideration while formulating domestic policy. second, the reality is that the policy instruments are far from being in a normal position. as the economy recovers, it is imperative that policy instruments be brought as quickly as possible back to a position consistent with the state of the economy. this is essential for the management of expectations as well as to re - create the capacity to respond, should another shock hit the economy. but, as important as it is to return to normal quickly, it is equally necessary to do so non - disruptively. the kind of rapid and massive reductions that were made to instruments during the crisis simply cannot be replicated in the reverse direction. growth is picking up and confidence gradually returning to businesses and consumers, but given the vividness of the crisis, the process is still likely to be vulnerable to both external shocks and domestic ones. rapid transitions in the policy regime might constitute one such shock. in essence, on this consideration, while rapid and drastic actions are entirely warranted when dealing with a crisis, managing a return to normalcy requires a more gradualist and calibrated approach. third, notwithstanding the above two issues, the fact is that inflation has taken hold, with both supply and demand pressures contributing to it. monetary policy must respond. the table indicates that it indeed has. action on rates and liquidity, through the crr, began in january and has continued at the measured pace indicated earlier over the past six months. one strong criticism of the reserve bank