and push factors. the pull factors are the promising growth prospects of emes, their declining trend rates of inflation, capital account liberalization and improved governance. the push factors are the easy monetary policies of advanced economies which create the capital that flows into the emes. what this says is that international capital flows comprise a structural component and a cyclical component. it is the cyclical component that typically causes all the adjustment problems for emes. 15. that said, the multi - speed recovery around the world and the consequent differential exit from accommodative monetary policy has triggered speculative capital flows into emes. the biggest problem thrown up by capital flows is currency appreciation which erodes export competitiveness. intervention in the forex market to prevent appreciation entails costs. if the resultant liquidity is left unsterilized, it fuels inflationary pressures. if the resultant liquidity is sterilized, it puts upward pressure on interest rates which, apart from hurting competitiveness, also encourages further flows. 16. currency appreciation is not the only problem arising from the ultra loose monetary policy of advanced economies. speculative flows on the lookout for quick returns can potentially lead to asset price build up. the assurance of advanced economies to keep interest rates “ exceptionally low ” for “ an extended period ” has also possibly triggered financialization of commodities leading to a paradoxical situation of hardening of commodity prices even as advanced economies continue to face demand recession. hardening of commodity prices has affected those emes which are net importers of commodities. 17. managing capital flows should not be treated as an exclusive problem of emes. in as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared. how this burden has to be measured and shared raises both intellectual and practical policy challenges. the intellectual challenge is that we do not have a good theory that explains the role of capital flows in the determination of exchange rates. we, of course, have an established theory of current account management and the role of exchange rate as a variable in that. what we now need is a theory that encompasses both current and capital accounts and one that gives a better understanding of what capital controls work and in what situations. that is the intellectual challenge. what is the practical challenge? the practical challenge is that once we have such a theory, we need to reach a shared understanding on two specific aspects : first, to what extent are advanced economies responsible for the

duvvuri subbarao : the reserve bank of india making a difference in your daily life convocation address by dr duvvuri subbarao, governor of the reserve bank of india, at the sambalpur university, sambalpur, 24 february 2011. * * * first of all, my thanks to the governor and chancellor, he shri m. c. bhandare, vice chancellor professor pujari, faculty and students of sambalpur university for inviting me to be the convocation speaker this year. this is an honour to which i attach a lot of value. it feels wonderful to be in this beautiful state of orissa and in the bustling sambalpur area. changes around the world all of you young graduates, passing out with degrees today, are a delightful sight. my mind goes back to my own college days. of course, my time took place roughly half way between the discovery of fire and the invention of the ipad!!! the world was, maybe a little bit different then! our phones still had cords, our cameras still had films and our engineers did calculations using a slide rule. the only way we knew of sending mail was by sticking stamps on an envelope ; and the only way we knew of making copies was by using a carbon paper. and if we wanted to look for the web, we didn ’ t click on a mouse ; we dusted in the corner. the world, and with it india, have changed in the last few decades. orissa then and now and changed for the better in many ways. look at orissa for instance. in 1970, orissa ’ s literacy rate was just 26 per cent, way behind the country. today, the literacy rate is close to the national average of 65 per cent with an impressive jump in the female literacy rate. child mortality rate more than halved between 1970 and 2010, but it is still behind the national average of 53 per thousand live births. there is significant progress on economic parameters too. following the familiar development trend over the last 40 years, the share of agriculture in the gross state domestic product declined and that of industry had gone up. the average population for bank branch declined from 110, 000 in 1970 to the national average level of 14, 000 in 2010. with only 8 per cent of its population living in towns and cities, orissa was the least urban state in india in 1970. urbanization almost doubled in the next 40 years, although it is