Rapid disinflation must not be allowed to turn into deflation. The ECB has reduced its reference rate by 225 basis points since last October. In the euro area the real short-term rate is now below 1 per cent; if official rates had not been cut, it would have risen considerably because of the fall in inflation.
At the same time, it should be emphasised that Taylor rule has its limitations as exclusive emphasis on interest rates with the neglect of other variables may not be optimal for an emerging market economy like India. In my presentation if I have raised more questions than provide answers, I would have succeeded in my intention.