g padmanabhan : india ’ s regulatory approach to sophisticated financial products comments by mr g padmanabhan, executive director of the reserve bank of india, at the award ceremony of dufrenoy prize for responsible innovation in finance, paris, 18 june 2012. * * * assistance provided by alpana killawala and ms indira nanu is gratefully acknowledged. ladies and gentlemen, c'est en effet un honneur et un privilege d ’ etre ici ce soir, dans une des plus belles villes du monde, d ’ accepter au nom de l ’ une des banques centrales les plus respectees du monde le prix dufrenoy de l ’ innovation decerne pour l ’ annee 2012, a la reserve bank of india ( pour nos calibrage politique dans le reglement des produits financiers ). je remercie tous ceux qui ont contribue a nous choisir pour cet honneur. maintenant avant que l ’ on me decerne le prix pour l ’ innovation dans la langue francaise, je voudrais continuer mon discours en anglais. ( it is indeed and honour and a privilege to be here this evening, in one of the most beautiful cities in the world and to accept, on behalf of one of the most respected central banks in the world, the dufrenoy prize for innovation, awarded for the year 2012 to the reserve bank of india, for our calibrated approach to the introduction and regulation of financial products. i thank all those who have contributed to conferring this honour on us. and now, before i am awarded the prize for innovations to the french language, let me continue my speech in english. ) let me begin by referring to the citation of the jury who decided on this prestigious dufrenoy prize to the rbi. the observations of the honourable jury members about the indian regulatory approach being precautionary and gradual, with a culture of testing and paying attention to potential negative effects of sophisticated financial products before facilitating them, precisely encapsulates the culture and methodology of the reserve bank of india, as it seeks to fulfill its mandate – by juggling the multifarious roles assigned to it – of maintaining stability of both prices and the financial system and supporting economic growth. in all the roles that we play, the common thread that underlies any

has been achieved. finally, i would like to say that the argument that economic growth is inhibited by a shortage of labor is incorrect. the argument essentially states that what impedes economic growth is the shortage of labor brought about by monetary easing measures. the argument therefore implies that monetary easing should not be carried out. 17 however, because monetary easing measures have increased employment, they have boosted economic growth. moreover, as a result of the shortage of labor, wages will rise. it is highly productive firms for instance, in the mainichi shimbun ( april 4, 2017, morning edition ), referring to the improvement in the diffusion index for employment conditions in the tankan ( short - term economic survey of enterprises in japan ), it was stated that labor shortages were becoming more severe, giving rise to concerns that such shortages might impede the recovery. that can pay high wages, while firms with low productivity can only pay low wages. therefore, if wages increase, highly productive firms will survive, and labor productivity in the economy overall will increase as well. in other words, rising wages due to a shortage of labor will promote productivity growth. on the other hand, some argue that low interest rates impede the economic metabolism. 18 they argue that, as a result of the decline in interest rates, firms'interest burden decreases, firms that should exit the market do not do so, and the productivity of the economy as a whole declines. however, what happens if firms exit and unemployment surges? productivity per person employed may increase, but output overall will decrease. although it might be an exaggeration to say that this would result in a surge in unemployment and social instability, it would inevitably lead to problems. on the other hand, firm turnover caused by labor shortages does not cause such problems. i think that there is no one now who would answer yes when asked " are you a deflationist, thinking that it is better for prices to fall? " in that sense, we are all reflationists now, hoping that prices will rise and the economy will improve. 19 that is why the bank continues to pursue its monetary easing policy. thank you for your attention. for example, shirakawa stated that " we may have to take into account the risk that a continuation of low interest rates will affect the productivity of the overall economy and lower the potential growth rate endogenously. " see shirakawa masaaki, " central banking : before, during, and after the