proof of the pudding is in the eating. do we believe that our actions are having the desired effect? on the growth front, while there is a certain amount of volatility visible in industrial production, by and large, there is no significant indication of the recovery stalling. on the inflation front, as was visible in the slides that i showed earlier, there are distinct signs of a deceleration of inflation over the past couple of months. the turnaround coincides with our expectation that inflation begins to respond to monetary actions after a six month lag. to examine this more closely, we look at the seasonally adjusted month - on - month rates of inflation, which give a sense of the momentum of inflation. slide 6 displays the pattern of this indicator. it clearly suggests that the momentum is currently negative. while the turning point on the overall index is early in 2010, the sharp deceleration in recent months may reflect the impact of monetary actions and gives us confidence that the inflation rate will moderate significantly by the end of the fiscal year 2010 – 11. i would like to conclude this discussion by emphasizing the point that the current episode of inflation posed a significant challenge to policymakers by virtue of its timing. monetary policy responses had to be calibrated to the needs of dealing with inflation while sustaining a growth recovery in a still uncertain global environment. the choices on the magnitude, sequencing and timing of actions were driven by the need to find a balance between these factors. long - term perspectives let me now take a longer term view of the growth - inflation balance in the indian economy. to begin with, we do have a fairly explicit statement of what we see as a desirable rate of inflation, consistent with the economy growing at its potential rate on a sustained basis. our policy reviews say that we would like inflation to be in the 4 – 4. 5 per cent range in the medium - term, while aspiring for a 3 per cent rate in the long term. this might sound a little unrealistic in the current scenario, but in order to both justify the aspiration itself as well as assess its realism we need to look at the historical record of inflation management in the indian economy. slide 7 provides a very revealing picture of how the growth - inflation balance has shifted in the indian economy. the first graph, relating decadal averages of growth and inflation over the past several decades clearly indicates that a steady upward movement in the growth rate has been accompanied by a steady downward movement in the

be very strong. rates did not come down very sharply in the expansionary phase and, while they are increasing in the contractionary phase, the magnitudes appear to be small. aggregation problems may be masking some of the impact. in the rbi ’ s consultations with industry, the fact that banks are aggressively passing on rate increases is often alluded to, which is undoubtedly intended as a complaint, but is entirely consistent with monetary policy objectives. finally, in the context of monetary actions and transmission, let me address the issue of real rates. one consistent critique of the monetary stance, that it has been behind the curve, is based on the criterion that real rates have been and still are negative. of course, this leads to a usually inconclusive debate on what the deflator should be, but widespread perceptions that real rates are negative are likely to impact both spending behaviour and expectations. this then leads to the more operational issue of whether rates are to be brought into positive territory relatively rapidly or gradually. charts 12 and charts 13 provide some perspective on the real rate issue. as chart 12 shows, with the recent acceleration in inflation, many real rates, measured in the simplest way of subtracting either current headline inflation or core inflation from the nominal rate, are negative when the headline rate is used to deflate. the picture changes, but hardly decisively, if the core ( non - food manufacturing ) inflation is used. so, going by some of these indicators, it may appear that the policy stance is not contractionary enough. however, when we look at some other measures of real rates, specifically bank lending rates as depicted in chart 13, the picture is a little different. allowing for differences in risk and other differentiating prices, real rates are significantly positive. as i said, this is a criterion on which the debate in the indian context is yet unresolved and is keeping some of my colleagues in the research departments engaged. the point i would like to make is that, at least in terms of a large proportion of financial transactions, real rates are positive. it remains a matter of judgment whether they are lower than they should be and, if so, how quickly the necessary adjustment should be made. this judgment is partly related to the issue of expectations. looking back over the past year and a half, the balancing act between growth and inflation can also be seen in a slightly different way. there is also a tradeoff between minimizing the sacrifice of growth and not