achieved through interest policy. although the rule applied to the price level rather than to inflation and was not forward looking, it is a clear parallel to the rules of thumb that are used today by those central banks that target inflation. sweden ’ s price stability norm in the 1930s lasted only a few years and was followed by a return to a fixed exchange rate regime. during those years, however, it performed the central function of stabilising expectations as well as prices. this was important not least because to some extent it helped shield sweden from the global economy ’ s depressive impulses and thereby contributed to the recovery being speedier than in most other countries. here i should perhaps add that although this swedish price stability “ experiment ” attracted a good deal of attention at the time, it certainly did not leave any deep or lasting mark on the modern approach to inflation targeting. in the aftermath of the depression and the second world war, keynesianism gained ground. the introduction of inflation targeting in sweden in the 1930s was therefore not as pioneering as when this kind of regime was introduced in the early 1990s, first by new zealand and later by others. a great advantage with a regime that explicitly targets inflation, is that the central bank adjusts the interest rate continuously in the light of inflation prospects. compared with a fixed exchange rate regime, imbalances can then be prevented from building up to the same extent. a slight upward adjustment of the interest rate at an early stage, to reduce the risk of inflation picking up, is something quite different from having to hike the short - term interest rate in order to defend a fixed exchange rate. as a personal reflection i can say that explaining the importance of low inflation is much easier - not least for a central bank governor - than the task of selling the advantages of a stable currency. this is particularly true as the latter task becomes increasingly pressing if the economy has been hit by problems with costs and is facing speculative attacks. some of you may remember that for a few days in the autumn of 1992 the instrumental rate in sweden was raised to as much as 500 per cent. in my view, this is probably one important explanation why sweden is not a member of the erm system - at least not at this stage. the challenge during the 1990s for the inflation targeting countries has been to build a rigorous framework around the new regime. answers have been needed in particular to questions like the following : what rate of inflation should be targeted, what index should be used, are bands around

to make any judgement about the desirability or productive nature of gold consumption to weave the policy around such a value loaded judgement. it would be appropriate to assess the indian reality and the implications of large preference for holding gold and take appropriate policy measures. on the basis of such an assessment, a positive approach will have several dimensions viz. macro policy, financial markets, external sector and protection of consumer interest. in terms of macro policy, the objective of reduced recourse to gold would be automatically served in the long run through economic development, though the immediate effect of increased prosperity could be preference for investment in gold. spread of literacy, particularly female literacy, could also help in reducing the preference for gold. above all, availability and easy access to different forms of financial savings on an extensive scale, particularly for women, to protect the traditional “ streedhan ” may prove to be the most viable policy option to encourage non - gold form of savings. of particular relevance to monetary authorities, price stability and reasonably low but stable interest rates are in the medium - term, likely to contribute to reduced preference or recourse to gold as a form of savings as well as investment. as regards the role of gold in financial markets, the policy has to recognise that the indian gold market has always been linked to international gold market in view of large requirements of imported gold. recognition of such integration as an inevitable reality and taking appropriate institutional measures, would reduce the transaction cost and impart stability to the indian gold market. further, gold has been virtually insulated from the local financial market in terms of financing of the gold or gold transactions by the banking sector. gold - linked financial instruments are not prevalent in the indian market and forward markets in gold are virtually prohibited. given the inevitable integration between the global and local gold markets, there is considerable merit in following the global practice of integration of gold markets with financial markets. the role of banks in the context of gold market has already been recognised, but banks are playing the role of essentially being canalising agencies. while such a risk free approach is defensible from a prudential angle, banks could fund financial instruments without taking a risk on their own balance sheet, thus improving efficiency in the goldlinked financial markets. in respect of the external sector, the liberalisation of import of gold has helped the removal of nonofficial transactions to a significant degree. however, the export of gold jewellery is still somewhat insulated from the domestic market. the economic