volatility which is indicative of well - anchored inflation expectations, despite the shocks of varied nature. although, inflation based on the wholesale price index ( wpi ) initially rose to above 6. 0 per cent in early april 2007 it eased to 3. 79 per cent by august 25, 2007. pre - emptive monetary measures since mid - 2004, accompanied by fiscal and supply - side measures, have helped in containing inflation in india. the policy preference for the period ahead is strongly in favour of price stability and wellanchored inflation expectations with the endeavour being to contain inflation close to 5. 0 per cent in 2007 - 08 and in the range of 4. 0 - 4. 5 per cent over the medium - term. monetary policy in india would continue to be vigilant and pro - active in the context of any accentuation of global uncertainties that pose threats to growth and stability in the domestic economy. improved fiscal performance yet another positive outcome of developments in recent years is the marked improvement in the health of government finances. the fiscal management in the country has significantly improved consistent with targeted reduction in fiscal deficit indicators after the adoption of the fiscal responsibility and budget management ( frbm ) act, 2003 by the central government. the finances of the state governments have also exhibited significant improvement since 2003 - 04 guided by the fiscal responsibility legislations ( frls ). with gross fiscal deficit of the central government budgeted at 3. 3 per cent of gdp in 2007 - 08, the frbm target of 3. 0 per cent by 2008 - 09 appears feasible. the revenue deficit is budgeted at 1. 5 per cent of gdp for 2007 - 08 ; the frbm path envisages elimination of revenue deficit in 2008 - 09. external sector india ’ s linkages with the global economy are getting stronger, underpinned by the growing openness of the economy and the two way movement in financial flows. merchandise exports have been growing at an average rate of around 25 per cent during the last four years, with a steady increase in global market share, reflecting the competitiveness of the indian industry. structural shifts in services exports, led by software and other business services, and remittances have imparted stability and strength to india ’ s balance of payments. the net invisible surplus has offset a significant part of the expanding trade deficit and helped to contain the current account deficit to an average of one per cent of gdp since the early 1990s. gross current receipts ( merchandise exports and invisible

loss of incomes and jobs would be even more pronounced. whatever the timing of the recovery, when it does come, we should not be expecting that we will return quickly to business as usual. rather, the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come. it is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses. even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist. and in the months ahead, we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen. there will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets. it is also probable that there will be structural changes in the economy. we are all learning to work, shop and travel differently. some of these changes will probably stay with us, requiring a rethinking of business models. so the crisis will have reverberations through our economy for some time to come. the best way of dealing with these reverberations is to reinvigorate the country ’ s growth and productivity agenda. as we look forward to the recovery, there is an opportunity to build on the cooperative spirit that is now serving us so well to push forward with reforms that would move us out of the shadows cast by the crisis. a strong focus on making australia a great place for businesses to expand, invest, innovate and hire people is the best way of extending the recovery into a new period of strong and sustainable growth and rising living standards for all australians. the reserve bank ’ s policy response i would now like to change tack and turn to the reserve bank ’ s policy response. to recap, that response has had five elements : 1. a reduction in the cash rate to 25 basis points with forward guidance that the cash rate will not be increased until we are making sustainable progress towards our goals for full employment and inflation 2. the introduction of a target for the yield on 3 - year australian government bonds of 25 basis points, and a preparedness to buy government bonds in whatever quantities are needed to achieve that target 3. the introduction of a term funding facility, under which authorised deposit - taking institutions ( adis ) have access to funding from the reserve bank for three years at 25 basis points, with additional funding available if adis increase