Deepak Mohanty: Wrap up and concluding remarks at the
SAARCFINANCE Governors' Symposium
Wrap up and concluding remarks by Mr Deepak Mohanty, Executive Director of the Reserve
Bank of India, at the SAARCFINANCE Governors' Symposium, Kumarakom, Kerala, 10 June
2011.
* * *
Governor Dr. Subbarao, governors of other SAARC member countries, heads of
country delegations, Dr. Reddy, Dr. Caruana, Mr. Ninan and distinguished participants
from the SAARC central banks and friends,
It has been a long day of exciting and thought provoking discussions on the very important
issue of financial stability. The backwaters of Kumarakom and the tranquil atmosphere of
Zuri has provided the perfect setting for a free flow of ideas throughout the day.
The theme of this symposium - financial stability issues - is appropriate for four major
reasons, from the stand point of global, regional and India specific considerations:
First, Financial stability has acquired the centre stage of public policy debate since
the global crisis, with animated discussions seeking clarity on the role of central
banks, particularly monetary policy.
Second, financial stability was assigned specific attention in formulating RBI's
monetary policy during the period when Dr. Reddy was the Governor of the RBI, and
this was reinforced considerably by Governor Dr. Subbarao. Thus, in India, the
dimension of financial stability was given due attention in the conduct of monetary
policy, even before the onset of global crisis.
Third, India had started using counter-cyclical provisioning norms and risk weights
prior to the global crisis, and in the post crisis period such measures - known widely
as macro-prudential tools - have become the mainstream consensus.
Fourth, given the level of development of the financial systems in the SAARC
countries, the debate on financial stability and monetary policy interactions may be
somewhat different from what we see in the advanced financial systems. The
development of the financial system, thus, has to be seen as an additional
consideration in this debate.
Going forward, the efforts should be to harness the true potential of finance in promoting
growth and development. In that process, increasing globalisation would require dealing with
external contagion and managing spillovers.
This symposium has provided us the opportunity to learn from each other in the SAARC
region, and also revisit our country specific perspectives on the emerging international
standards.
Deputy Governor Dr. Subir Gokarn in his welcome remarks set the tone for discussions to
follow. He noted how the global financial crisis had shaken our faith on some of the pre-crisis
persuasive arguments - what he termed as near truths. He highlighted that an increasing
number of central banks had started including financial stability formally in their policy
mandates along with price stability. But the definition of financial stability remains largely
informal. He emphasised that the financial stability mandate and governance arrangements
for central banks must be compatible with their monetary policy responsibilities. For the
SAARC countries, given the levels of development, he underscored the point that financial
literacy and financial inclusion goals should not get marginalised because of the overdrive for
financial stability.
Governor Dr. Subbarao highlighted issues relating to the mandate of central banks for
financial stability in the international and Indian context. Making a strong case for the central
banks to play a key role in ensuring financial stability, Governor Subbarao outlined the
challenges in managing the relative prioritization across multiple objectives. He also talked
about the difference between a central bank's role in ensuring financial stability in crisis times
vis-a-vis
during normal period. The recent trends in arrangements for financial stability giving
increased responsibility for both systemic oversight and prudential regulation to central banks
and institutionalisation of collegial arrangements are seen as important. A similar move in
India is reflected in the creation of the Financial Stability and Development Council (FSDC).
In this context, Governor Dr. Subbarao emphasised particularly the "D" in FSDC.
This stands for the development dimension of the financial sector. Irrespective of the type of
new institutional arrangement, he stressed that coordination mechanisms, especially
between the government and the regulators, must function in ways that do not compromise
the autonomy of the regulators.
The conduct of monetary policy in a world with macro-prudential policies could pose both
known and unknown challenges. The presentation from Mr. Caruana provided possible
approaches to adoption of macro-prudential measures, with necessary caution. He noted
that stable, resilient and less pro-cyclical financial systems improve the effectiveness of
monetary policy transmission. He also viewed that macro-prudential policies should not be
used to safeguard macroeconomic stability, since there is no substitute to monetary and
fiscal policies for attaining that goal. He cautioned that expectations from macro-prudential
policies should not be ambitious, since without a range of reinforcing policies and
instruments, the effectiveness of prudential measures could be limited. On the scope for
conflicts between monetary policy and macro-prudential policies, he viewed that such
concerns were overdone. He suggested that multiple objectives could be explicitly ranked,
and that the timing of macro-prudential policy reviews could differ from monetary and fiscal
policy cycles.
Dr Y V Reddy emphasised in his address the potential "crisis ahead of us" as a motivation for
such debates that we had today. He viewed that the lessons from "crisis behind us" could be
extremely important in shaping the financial stability goal.
He outlined some of the key aspects of the pre-crisis stability entrenching measures taken in
India, including explicit attention given to financial stability as an objective. His reference to
the change from "lazy banking" to "crazy banking" as evidenced by significant pick up in
credit and money growth, exuberance in real estate and consumer credit needs to be seen in
an important way, i.e., the driving motivation behind use of macro-prudential measures in
India for preserving financial stability. He emphasised on fiscal consolidation and in removing
structural rigidities in the real economy to reinforce financial stability. He expressed
reservations about the appropriateness of 2019 target date for new capital standards. He
drew attention to the power of large conglomerates in diluting disciplining norms, with the
potential to move to locations with less aggressive regulatory jurisdictions.
In the two technical sessions that followed, country presentations were made. It was indeed
an honour and privilege to have the Governors of the central banks of Afganistan, Bhutan,
Nepal and Sri Lanka, and deputy governors of Bangladesh, Pakistan and Maldives to grace
the symposium with their valuable contributions to the discussions. The country papers
besides reviewing financial sector developments brought to the fore the diversity that prevails
across countries.
The Afghanistan paper drew attention to vulnerability to fluctuations in forex flows. It
highlighted the challenges that could arise from the failure of systemically important banks.
The paper from Bangladesh highlighted the role of microfinance as also asset price
pressures and balance of payments challenges arising out of volatility in remittance inflows.
The paper from Bhutan drew attention to legislative changes granting the central bank
autonomy in monetary management as also in the oversight of the financial system.
Pakistan's paper noted how high fiscal deficit is crowding-out private investment in a bank
dominated financial system.
The paper from Maldives underscored the importance of payments system for a sparsely
populated country, particularly mobile phone payments system.
The paper from Nepal showed how its banking sector encountered liquidity shortage arising
from the slowdown in deposit mobilisation and contraction in forex reserves, and how large
flow of credit to real estate reduced the availability of financial resources for productive
activities.
The paper from Sri Lanka highlighted the importance of principles based corporate
governance norms and consolidated supervision.
The paper from India presented the growing interconnected dimension of the financial
system and highlighted the significance of systemic risk analysis.
The stimulating panel discussion that followed was anchored by Mr. T.N. Ninan, President,
Editors' Guild of India. Financial stability in the post crisis period has thrown several
unanswered questions.
First, the issue of price stability vis-à-vis financial stability. Second, the post crisis institutional
arrangements for financial stability. Third, the challenge of implementing the international
regulatory and supervisory reforms by SAARC countries with country-specific adaptations.
This relates to the Basel III framework, regulation of SIFIs and OTC derivatives markets.
Fourth, the challenges of micro-prudential supervision in ensuring stability at the systemic
level and the importance of macro-prudential policies. Fifth, the link between asset prices
and financial stability.
These are issues on which, as the panel discussion revealed, the search for consensus is
on. However, lack of consensus should not be a reason for national authorities not to take
country specific decisions. Preserving financial stability will continue to be a national priority.
During the panel discussion several important points emerged, which included:
• the role of confidence in shaping macro-financial conditions;
• post crisis changes in regulatory architecture being driven largely by advanced
economies;
• continued relevance of the role of the public sector in the financial sector of the
region, particularly infrastructure financing;
• new arrangements on coordination between the Government and regulators are yet
to be tested;
Mr. Ninan concluded the panel discussion by emphasising how the discussions helped in
improving our understanding of complex issues.
Let me attempt some specific takeaways from this symposium:
First, irrespective of the nature of the mandate - i.e. whether explicit or implicit -
central banks will have to assume greater responsibility for financial stability, which
in turn may mean multiple and not single objective to conduct of monetary policy.
Second, crisis prevention frameworks need to be strengthened in every country, but
the approach to be adopted requires debate, consultations and coordination.
Third, given the level of economic development in the region, the usual suspects
that could trigger a financial crisis must be avoided. This implies sustained emphasis
on fiscal consolidation, low inflation, appropriate policies to manage volatile capital
flows, and a sustainable balance of payments. The approach to reforms, going
forward, must seek to balance the "growth and efficiency gain" goals on the one
hand with "growth and equity goals" on the other.
Fourth, since national policies at times may not be adequate in a globalised world,
voice of countries in the region in global governance may have to be collectively
raised. Global safety nets and global surveillance would have to be seen as an
integral part of financial stability initiatives.
Fifth, financial sector development would require a cautious approach but without
stifling innovations, as the financial markets remain incomplete in the SAARC
region.
Finally, I must thank now all involved in organising this symposium, having worked tirelessly
for making this event a unique experience. I thank Governor Dr. Subbarao for his guidance
for the conduct of the event.
Our thanks to the distinguished guests from the SAARC region for making the discussions so
lively. I thank the senior management of the Reserve Bank who are present in full strength.
The burden of organisation primarily fell on the Regional Director of Kerala and the staff from
our Kochi and Trivandrum offices. Our deepest appreciation to all of them. Thanks are due to
the organising teams from the Department of External Investment and Operations (DEIO)
and Department of Economic and Policy Research (DEPR) from the central office of the RBI.
I thank the Government of India and Government of Kerala for their support. I thank the
Kerala Police for providing security coverage. Special thanks are due to the Hotel staff and
management of Zuri resort and ERGO, the service provider for making excellent
arrangements.
I once again thank all those who have been associated with this conference directly or
indirectly.
Thank you.