The report pointed out that as far as monetary impact on prices is concerned, the measurement of inflation has become a major issue in the recent period as inflation rate as measured by the point-to-point variation in the WPI has shown a steady decline, reaching one of the historical lows of 1.19 per cent as on July 24, 1999.

However, on an averaging of weekly data basis, the inflation rate thus measured during this period was 5.64 per cent, while the long term inflation rate for nearly three decades was about 8.5 per cent a year. "Monetary growth as revealed by the trend in the growth of broad money has on the other hand remained close to its long run rate of about 17 per cent. Thus, the current inflation rate seens to have diverged significantly from its long term trend," the report pointedout.

Kicking off a debate on the impact of the monetary policy on inflation and growth, in its annual report released on Tuesday, the central bank said: "In the emerging market economies, where financial markets are still evolving and have to acquire the required degree of depth and maturity, the control of monetary policy over long-term interest rates, through the use of a single monetary policy instrument such as a short-term reference rate of a liquidity adjustment mechanism may not have a strong impact on inflation and growth."

It added that the preliminary evidence in the Indian context shows that the full impact of a monetary shock on the inflation rate can take a long time to realise and the lag could even be more than two years.

Explained the RBI report: "Notwithstanding a fair degree of association between money and prices over a long horizon, the evolving transmission mechanism in the more recent years, which are characterised by financial sector reforms and growing market integration, therewould be increasing significance of the interest with implications for the underlying relationship between the growth in money supply and inflation rate."

The RBI has said that by now while monetary factors explain the long run price situation, the divergence of inflation rate in the short run from its long run value could arise from several factors including the supply side shocks.