into productive investments the huge flow of household savings generated, since those countries including mainland china, have savings - to - income ratios that are three, four, or even more times than the countries in the west. for all its potential contributions to economic growth, banking remains fragile. the high leverage combined with their “ extreme mismatch ” of maturities ( funding long - term assets with short - term and, in some cases, foreign currencydenominated liabilities ) and reliance on demand deposits, makes them inherently vulnerable – and their economies to severe and recurring credit crunches. 14. although banks play an important role in these economies by channeling funds from depositors to companies without access to capital markets, banking itself, says nobel laureate merton miller from university of chicago, is “ basically a 19th century technology ”. today ’ s emerging asian economies do not have well - developed capital markets and so remain heavily dependent on their banking systems to finance growth. however, as miller bis central bankers ’ speeches argues, countries should develop a well fleshed out set of financial markets and associated institutions. 15. according to an asian development bank ’ s study the initiatives to develop bond markets should focus on : ( i ) sustaining a stable macroeconomic environment with low inflation and stable interest rates ( ii ) developing a healthy government bond market that would serve as a benchmark for the corporate bond market ( iii ) completing the post - crisis agenda of banking sector restructuring ( iv ) improving corporate governance ( v ) strengthening the regulatory framework for bond market ( vi ) rationalizing tax treatment of bonds ( vii ) broadening the investor base, and ( viii ) promoting the growth of regional bond market centers. indian debt market bank credit 16. india has the distinction of long history of both banks and capital market. economic history of india narrates how both have been vibrant in many important cities, though mumbai has been dominating all others. slowly and steadily, especially after nationalisation, the banking sector has emerged as the source for investment funding. 17. in india, bank credit has been the significant contributor to the investment. bank credit increased from ₹ 5 billion as at end march 1951 to ₹ 13 billion by march 1961, ₹ 47 billion by march 1971, ₹ 254 billion by march 1981, ₹ 1164 billion by march 1991, ₹ 5114 billion by march 2001, ₹ 39420 billion by march 2011 and ₹ 67352 billion by march 2014. what has been the contribution of capital market? during the 1970s,

– instead of singling out one risk – consider each item on the list and try to address what i believe are burning questions in your mind. let ’ s start with the fed moves. you may ask, will the bsp follow the fed ’ s cue in terms of the timing and magnitude of the lift - off? my answer – not necessarily. we won ’ t have to sing the same tune, but we will certainly have to sing in harmony. what do i mean? recall q2 last year when we embarked on a series of monetary tightening actions. the fed had not yet moved, but markets were certainly talking about it at the time. a number of factors were at play during that period last year. 1 ) domestic inflation was threatening to breach the inflation target on the upside, and 2 ) m3 had been growing over 30 percent as a result of the operational adjustments in our sda facility that we put in place to account for capital inflows. fortunately, the economy was growing robustly then, and therefore there was no need to provide any monetary stimulus. in other words, it was our assessment that the economy could withstand some tightening in financial conditions at that time. you will recall that in our communication then, we further indicated that the moves were also motivated by the anticipation of fed normalization. it was pre - emptive monetary tightening in order to help guide the domestic markets and break any tendency to under value / appreciate risks. our concern was that an acute / unabated undervaluation of risks would create financial stability pressures, particularly in the real asset markets. while the risk of overhearing in the asset markets has since dissipated, we are not about to reverse that course of action yet. we will, however, consider 1 ) the actual and expected capital outflows that may result from the current global financial market rout and their impact on m3 growth, and, 2 ) carefully review the balance sheets / portfolios of the banking system to see if there is a need to adjust policy settings or tweak macroprudential measures. we will also, and more importantly, monitor inflation expectations. we have shared with you that for 2015, inflation is likely going to be lower than the government ’ s target band. even so, inflation is seen to move higher and into target range in 2016 and 2017. mindful therefore of the significant lags of monetary policy, we will be careful in making adjustments to policy settings going forward. now let ’ s