india as a modern economy and an inclusive society. 5. as governor of the reserve bank during 1943 – 49, sir chintaman ’ s intellectual values, progressive outlook, meticulous planning and his ability to think outside the box played a critical role in steering the economy through turbulent waters. i know from personal experience that the job of a governor, more than most other positions, involves managing the tension between doing what is expedient in the short - term and what is good in the medium to long run. by his actions, sir chintaman demonstrated that the dharma of a central banker is always to defend long term sustainability against short term compulsions. 6. i struggled to determine how best to pay a tribute to a person of the intellectual stature and social commitment of sir chintaman. as i read about him, i realized that he was among those who believed in building a modern india based on reevaluating conventional wisdom and finding fresh approaches to old problems, and new answers to old questions. 7. that has a resonance with the situation today as the world is trying to grasp the aftermath of the most devastating financial crisis of our time. the global crisis has challenged many of our ideas and reopened questions that we thought have been settled. in the spirit of paying tribute to the memory of shri deshmukh and his remarkable intellectual traits, i want to raise five old questions and see how the crisis has possibly thrown up new answers. the five questions are : ( i ) have emerging market economies ( emes ) decoupled from the advanced economies? ( ii ) should central banks persist with pure inflation targeting? ( iii ) should financial stability be an explicit mandate of central banks? ( iv ) are controls an appropriate mechanism for managing the capital account? ( v ) has fiscal dominance of monetary policy ended? question 1 : have emerging market economies ( emes ) decoupled from the advanced economies? 8. the answer before the crisis was an increasingly assertive “ yes ”. the decoupling hypothesis held that even if advanced economies went into a downturn, emes would not be affected because of their improved policy framework, robust external reserves and resilient financial sectors. it is difficult to trace the precise origins of the decoupling hypothesis but it would be fair to surmise that it was inspired by the superior growth performance of emes as compared to advanced economies. 9. clearly, differential growth performance by itself is not conclusive confirmation of the decoup

the boundary itself varies for different regulatory clusters – the focus of a banking regulator would be entirely different from that of a securities regulator, from that of an insurance regulator etc. and all of which may be different from the focus required for regulation of markets. if the entire financial system is looked as a single ecosystem, then inspite of the inherent differences between the various market players, it should be possible to identify the macro drivers of the whole system, the network flows. using this perspective, it becomes evident that just focusing only on the perimeter would be missing an integral component that may need regulatory attention. current crisis – perimeter issues as mentioned earlier, the origins of the current crisis lay within the heavily regulated institutions. the impact of the crisis, however, was exacerbated by dynamic interconnectedness between entities across regulated, unregulated and lightly regulated sectors. as some of the recent reports have pointed out, the two concerns relating to “ outside perimeter ” entities that contributed to the current crisis were : ( i ) maturity transformation being undertaken by these entities, which traditionally used to be a function of banks ; and ( ii ) the systemic leverage resulting out of the hugely leveraged positions of these entities, either through direct borrowing from banks or through the funding markets. the central issue in both the above is the interaction between the unregulated entities and the formal regulated funding channels, essentially banks and money markets. the maturity transformation primarily entailed heavy reliance by these entities on short term funds for funding long term assets. the prudential framework for banks placed a significant reliance on management of these alm mismatches but the unregulated entities, such as sivs didn ’ t have any oversight and as a business model, ran huge alm mismatches. the model just broke down when the funding markets started seizing. many of the entities, like hedge funds, were consciously left unregulated because of the fact that they managed only private capital pools where the issue of investor protection was not relevant. however, what was not appreciated was the systemic risks these entities were posing on account of the huge leverage positions these were carrying through either the formal banking channel or the funding markets, particularly repo markets. the seamless efficiency thought to be provided by close integration of the underlying asset markets and repo markets proved to be just a chimera. the disaggregated exposures of the regulated clusters at any point of time to the unregulated entities