duvvuri subbarao : retail payments – perspectives and way forward valedictory address by dr duvvuri subbarao, governor of the reserve bank of india, at the regional seminar on payment and settlement systems, organised jointly by the reserve bank of india and the bank for international settlements, mamallapuram, chennai, 19 march 2009. * * * introduction it is a great delight for me to be here at the conclusion of this seminar on payment and settlement systems aimed at improving our understanding of the way forward on this vital segment of central bank infrastructure. here, at the reserve bank of india ( rbi ), we have traversed a steep learning curve over the last several years, and come a long way in implementing an efficient and effective payment system. i am deeply conscious of the fact that we still have a long way to go. on the way forward, we are challenged by the fact that the unknown unknowns are larger than the known unknowns, which in turn are larger than the known knowns. our task on the way forward really is to learn from the international best practices and adapt them to the indian context. seminars such as this are, therefore, very rewarding learning experiences for us. i hope, the foreign participants too found this seminar useful, rewarding and, may i add, enjoyable. i am told you covered many important topics over the last three days, and i gather, there is greater clarity on various issues such as the growing importance of retail payment systems, the relative roles of banks and non - banks in the payment systems, the main principles governing oversight, prepaid cards, aspects relating to cross - border remittance services and even issues pertaining to branchless banking. i want to use the opportunity of this valedictory address to share with you the significant changes in the payment systems in india, the reserve bank ’ s role in this area and to look ahead at some of the challenges going forward. but first allow me a small digression. i hope you have all had some time off for going round and enjoying the sights and heritage of this famed part of india. mamallapuram bears testimony to the rich, ancient culture of this region, which was long forgotten, thanks to rapid developments in its vicinity, leaving this once - upon - a - time great trading port almost at the brink of extinction. nature too, played a role in the erosion of this piece of history. the great shore temple that we see is believed to be

more information, see the box on page 12 of the february 2014 inflation report. all speeches are available online at www. bankofengland. co. uk / news / speeches chart 6 : households consistently expected increases in interest rates to be gradual and limited median household bank rate expectations per cent 2014 q1 2015 q1 pre - crisis average level of 2016 q1 2017 q1 2018 q1 years ahead notes : household expectations are from the bank / tns inflation attitudes survey and show how bank rate is expected to increase relative to the rate prevailing at the time. pre - crisis average bank rate is calculated from 1997 to 2007 inclusive. in the event, the unemployment rate fell far faster than the mpc had expected, falling below 7 % in february 2014. but even as the recovery strengthened and survey indicators of output growth reached levels previously associated with sharp policy tightenings, household, company and market expectations about the future path of policy remained subdued and interest rate volatility remained low ( chart 7 ). people understood the conditionality of guidance, as they and the mpc had learnt that there was still considerable spare capacity in the economy. chart 7 : interest rate volatility has remained low since guidance was provided standard deviation of option - implied distributions for 3m libor in 12 - months ’ time basis points august 2013 guidance issued february 2014 guidance issued eu referendum sources : bloomberg finance l. p., chicago mercantile exchange ( cme ), intercontinental exchange ( ice ) and bank calculations. all speeches are available online at www. bankofengland. co. uk / news / speeches the improved transparency of the inflation targeting framework also promoted this smooth learning process about the supply side that helped maximise economic outcomes. starting in 2014, the mpc began carrying out a stocktake of the supply side of the economy each year, publishing its best collective judgments on the natural rate of unemployment, the output gap, as well as the expected growth in productivity, labour supply and potential output. 9 as part of these exercises, the mpc revised down its ( hitherto private ) estimate of equilibrium unemployment rate from 6½ % in august 2013 to 5½ % in august 2014, 10 though it also judged that spare capacity in the uk economy was gradually being used up as demand was growing rapidly while supply growth was still subdued. in short, spring was gradually turning to summer. ii. summer – supporting the expansion by the end of 2014, the challenge for the mpc had become to keep the