market economies, which has been coming down in tandem with global rates, will tend to be distinctly higher than in the developed economies. if so, how much higher would be appropriate? even a moderate inflation rate poses a dilemma in an increasingly open - economy framework. if the domestic inflation rate of an economy, however low it may be, is higher than the average inflation rate of its trading partners, it puts pressure on the exchange rate. in this context, the question of simultaneous balance of the internal and external sectors becomes a major issue. the conduct of monetary policy inevitably involves a careful judgment on the relative weights assigned to the domestic and the global factors and constant reassessment of these in response to evolving circumstances. in a dynamic setting, when the financial markets are continually evolving, and payment systems and technology are changing rapidly, one may not find a clear - cut evidence of stability in monetary rules and intermediate targeting. in such circumstances, monetary authorities are being constrained to look at all relevant indicators, following a menu or a ‘ check list ’ approach. discerning news from noise is a persistent dilemma for conducting monetary policy. since external capital flows to emerging economies cannot be easily predicted and can also reverse even in the presence of sound fundamentals, monetary authorities have to make choices in regard to exchange rate and monetary management, very often. the appropriate management of monetary policy may require the monetary authorities to consider offsetting the impact of foreign exchange market operations, partly or wholly, so as to retain the intent of monetary policy. the monetary authority has to decide on the extent of off - set as also the means of off - set – market based or nonmarket based or a combination of the two. financial stability considerations may require the use of interest rate tool, in conjunction with other prudential measures. some times, there could be even a trade - off between raising the short - term interest rate and tightening of prudential norms, if the risks are perceived to originate from certain segments of the market. the highly leveraged lending operations in the backdrop of asset - price bubbles might require adjustments in the lending margins and risk - based capital requirements. an issue in this regard is the extent to which these should be considered akin to the erstwhile selective credit controls. globalisation and the financial sector the international financial markets are currently dominated by private equity funds like hedge funds, which are largely operating outside the ‘ know - your - customer ’ / ‘ know - your - investor ’ ( kyc / ky

mitigate the domestic and external effects of financial crisis, particularly in large economies like china and india. fourthly, the impact of instability in times of crisis appears largely to be borne by the home or domestic public sector rather than the global private sector. avoiding crisis is ultimately a national responsibility. in such a milieu, the policy makers are often confronted with competing positions and need to make choices in the face of daunting dilemmas. concluding remarks in a recent survey of the world economy, the economist ( september 16, 2006 ) predicted that the emerging economies are set to give the world economy its biggest boost since the industrial revolution. a greater integration into the global system of production and trade, supported by buoyant capital flows, is driving a widening wedge between the emerging and the developed countries in terms of growth rates. already accounting for more than half of the world gdp, in purchasing power parity terms, they will raise their share to two - thirds of the global output in 20 years'time. it took 50 years for britain and america to double real income in the 19th century when they were industrialising ; china is achieving the same feat in nine years! over the next decade, almost a billion new consumers will enter the global marketplace, providing an enduring stimulus to economic activity across the world. in all humility, it needs to be recognised that despite soaring economic growth, real per capita incomes and therefore, standards of living in the developing countries remain well below those in the developed countries. as the bric report of goldman and sachs ( 2003 ) had thoughtfully projected, the average per capita income in america would still be three or four times higher than in china even in 2040. the imf has estimated that if india's relative per capita income rises by under 2 per cent, it will take more than a 100 years to close half the distance from the developed countries'per capita income levels. if india's per capita income grows by three per cent in real terms, it will still take 69 years to close half the gap. more important, faster growth alone will not automatically eradicate poverty ; it depends on how inclusive that growth is and how the benefits of globalisation are shared. the future will, in all likelihood, call for some radical thinking, perhaps new vistas of development in operational and institutional frameworks of monetary policy. so far, it is claimed, the emerging economies have made the work of monetary authorities a lot easier than before by subduing inflation both