A new normal based entirely on domestic considerations will result in a permanent wedge between domestic and global inflation which means a persistent real appreciation of currency. Real appreciation is unambiguously contractionary and militates against our growth aspiration. To support sustainable growth during a period when the economy is globalizing, our inflation rate needs to converge with the global inflation rate.
This is the rationale behind the Reserve Bank’s policy of calibrating its medium term inflation goal to global inflation. 51. This is an appropriate context for me to respond to the argument for a new normal based on the PPP convergence argument.