of credit and stable capital flows and underpins the transmission mechanisms for monetary policy. price stability strengthens financial stability. low and stable inflation provides households and enterprises with a clear indication of changes in relative prices. this makes it easier for economic agents to make the right decisions and leads to greater price stability in financial and property markets than would otherwise be the case. developments in credit and asset prices have an influence on inflation. we take this into account in our interest - rate setting. we are also aware of the potential risks to financial stability. the current low interest rates make it easy to service debt. the household interest burden, i. e. interest expenses after tax in relation to the sum of interest expenses and disposable income, is low despite strong growth in debt. the interest burden will increase, however, when the interest rate reaches a more normal level. only 14 per cent of household loans are fixed - interest loans. this is low in relation to other countries and makes households vulnerable to an interest rate increase that is higher than currently expected. compared with losses on loans to the enterprise sector, losses on loans to the household sector were low during the banking crisis at the end of the 1980s. despite high real interest rates and a decline in income, households were largely able to service their debt. high interest expenses and a decline in income, however, forced households to reduce consumption. this led subsequently to lower turnover in enterprises and weakened profitability and debt - servicing capacity. in this way, households contributed to an increase in banks ’ losses on loans to the enterprise sector. the higher the household debt burden, the stronger the potential spillover effect from the household sector to the enterprise sector. the effects of weak economic developments and / or a change in interest rates on financial stability will depend both on the initial situation in households and enterprises and on banks ’ ability to absorb losses. an analysis presented in financial stability 1 / 04 showed that a sharp increase in interest rates and a subsequent fall in house prices may increase banks ’ losses to 2. 5 per cent of gross lending. this is roughly half of what losses were at the beginning of the 1990s. the moderate increase in loan losses is due primarily to an improved financial situation in the enterprise sector. banks ’ capacity to absorb loan losses depends on their results and their capital adequacy. in the same report, we assessed the capacity of the seven largest banking groups to absorb losses by measuring how large the losses would have to be over a three - year

demand. interest rate change don ’ t matter so much. when food prices rise, the extra income earned by the financially excluded is not saved but instead consumption is increased, leading to higher aggregate demand. in this kind of a situation, the efficacy of monetary policy in achieving its stabilisation objective increases by targeting a measure of prices that includes food prices rather than one that excludes them such as core inflation. the lower the level of financial inclusion, therefore, the stronger is the case for price stability being defined in terms of headline inflation rather than any measure of core inflation that strips out food and fuel. in india, food accounts for 46 per cent of the cpi, among the highest shares anywhere in the world. furthermore, the cpi combines a rural index and an urban index, with the share of food being even higher in the rural index at 54. 2 per cent. in the urban index too, the share of food at 36. 3 per cent is also sizable in a crosscountry perspective. consequently, aggregate demand is highly influenced by the behaviour of food prices and farm output, rather than interest rate changes to which the urban index could be sensitive. it is in this context that the monetary policy framework overhaul in 2016 to usher in a flexible inflation targeting regime wisely chose the headline cpi as its metric for measuring the inflation target rather than any measure of core inflation, despite persuasive arguments for the latter that are made even today. headline cpi inflation averaged 3. 9 per cent since the institution of flexible inflation targeting right up to the onset of the pandemic in march 2020 ( i. e., during october 2016 – march 2020 ). with the first onslaught of covid - 19, headline inflation breached the upper tolerance band and averaged 6. 2 per cent in 2020 - 21. strong supply side interventions to expand access to buffer stocks and imports, to incentivise productivity, and lowering of taxes tamed the upsurge and aligned headline inflation again with the target, barring short - lived spikes due to inclement weather in key vegetable producing areas. food inflation has been volatile throughout this period, reflecting the incidence of supply shocks on the production of items to which inflation is particularly reactive. it rose from an average of 2. 9 per cent during the fit period of 2016 - 20 to 7. 4 per cent in 2020 - 21 at the height of the first wave of the pandemic, but the policy interventions have managed to temper it to 3