supply shock could have an adverse impact on expectations and hence the medium - term inflation outcome. we have seen it recently. as the global economy recovered from recession in 2009, commodity prices, particularly food and oil prices rebounded raising headline inflation in many countries. however, headline inflation soon moderated in many advanced economies, as inflation expectations remained well anchored, besides significant negative output gap. of course it is difficult to measure and interpret inflation expectations in a developing country like ours. however, the rbi ’ s quarterly household inflation expectations surveys conducted in select urban centres suggest that inflation expectations in india have remained elevated in double digits for quite some time now. 3 the broad consensus in policy analysis is that while one could look through the first round direct impact of supply shock induced inflation, policy should respond to the second round effects so that the inflation process does not get generalised. “ … the direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations. ” 4 to sum up, the nature and composition of food inflation has changed in the recent years. as per capita income has increased the demand for food has shifted towards protein, fruits and vegetables. as supply response has not been adequate, there have been price pressures. in addition, the agricultural sector experienced cost - push both in terms of increasing price of material inputs and labour. let me conclude with some thoughts on the way forward so that the food economy does not pose a major constraint on the path of non - inflationary growth that could be sustained over the medium - to long - term. first, there is substantial wastage of agricultural produce, particularly perishables like fruits and vegetables which needs to be minimised by improving the supply chain logistics by setting up cold chains and processing facility at producing clusters. second, there is a need to further liberalise agricultural trade by modifying agricultural produce marketing committee ( apmc ) acts by state governments and even exempting perishables like fruits and vegetables from the provisions of apmc to give wider access to both producers and traders for better price discovery. please see http : / / www. rbi. org. in / scripts / publicationsview. aspx? id = 15423 for the latest results of the inflation expectation survey of households. subbarao, d., ( 2011 ), “ the challenges of food inflation ”, presidential address at the annual conference of the indian society of agricultural

marketing at hyderabad, november 22. bis central bankers ’ speeches third, over the medium term supply can be improved in a non - inflationary manner by augmenting productivity. one important way of productivity expansion is through greater mechanisation. however, dominance of small size of land holdings puts a constraint on the choice of technology. hence contract farming and leasing of farmland while protecting the ownership rights of small landholders should be facilitated to enhance production and productivity. fourth, from the demand side dispensation of social welfare benefits through cash transfer would help not only in rationalising demand for food products but also in containing the distortionary effect on the labour market resulting in a more economic use of the labour supply. finally, while the major policy actions to augment food supply may not be in the domain of monetary policy, it may have to perform a careful balancing act so that a sharp action does not choke off supply response and a weak response hardens inflationary expectations. thank you once again for your kind attention and for inviting me to deliver this prestigious lecture which has been a privilege. bis central bankers ’ speeches