y v reddy : financial globalisation, growth and stability : an indian perspective remarks by dr y v reddy, governor of the reserve bank of india, at the international symposium on “ globalisation, inflation and monetary policy ”, organised by the bank of france, paris, 7 march 2008. * * * chairman nout wellink, governor noyer, distinguished academics and fellow central bankers, i am thankful to the banque de france for giving me this opportunity to participate in the international symposium on " globalisation, inflation and monetary policy ". i will present some of the aspects of the indian experience on the subject and conclude by briefly flagging select issues in the light of recent global developments. financial sector reforms in india, reforms to improve efficiency and soundness of the financial sector started early in the reform cycle that commenced in 1991 – in some ways anticipating the gains that would accrue from the resultant flexibility in product and factor markets. however, the process of strengthening of the functioning of the financial institutions in terms of prudential framework, operational efficiency and regulatory / supervisory regimes has been gradual. it was also calibrated with the development of money, forex, government securities and equity markets. at the same time, the pace and content of reforms in banking, financial and external sectors are closely aligned with the progress in reforms in the real and fiscal sectors and in the public sector as a whole, considering in particular that the banking sector in india is dominated by the public sector. our attempts to align the financial sector with the global best practices do take into account progress achieved in public policy in regard to similar alignments in related areas, especially the real sector flexibilities, fiscal health and overall governance standards. in the indian context, considerable weight is currently accorded by the reserve bank of india ( rbi ) to price and financial stability while recognising its twin objectives of growth and stability. the large segments of the poor tend to reap the benefits of high growth with a time lag while the rise in prices affects them instantly. further, we recognise the limited capacity of the poor to bear risks that may occur in the real sector by virtue of developments in the financial sector, in the absence of social security mechanisms and public safety net. let me illustrate with two examples of emphasis on stability in relation to financial institutions and financial markets. first, the centrality of the banking sector, especially the retail deposit base and credit disbursement, is maintained while gradually expanding the

is still indeterminate. further, as illustrated by china and perhaps india, major contributors to the price moderation so far, consequent upon global integration, have remained relatively less open on capital account and have a moderately integrated financial sector. second, the link between open capital account and growth performance is not fully confirmed by the experience of the two largest emerging markets, though such a link is not entirely refuted either. in view of limited experience so far it is also useful to explore the link between movement in asset prices and financial integration vis - a - vis trade integration. in any case, the assumption that a managed capital account generates adverse sentiments in financial market is not fully borne out so far by the two aforesaid examples which experience large capital inflows. this points to the need for assigning greater weight to macro - economic fundamentals than to the state of capital account openness. third, recent turbulence in financial markets / institutions and the importance of harmonised and coordinated response of public policies indicate the significance of countercyclical fiscal and monetary policies. is it possible to argue that similar harmonisation between monetary policy and prudential policies would be of some value as part of counter cyclical measures? fourth, in regard to regulation and supervision over banks, it is useful to explore whether the special status of banks in the financial system and the need for active coordination among regulators / supervisors needs to be reaffirmed. further common persons in most of the societies would like to have a set of institutions where almost total safety of funds is assured and these traditionally are the banks. hence, if the concept of reasonable expectation in public policies is accepted in regard to banks ( as evidenced by the experience with northern rock ), the pre - eminence of depositors'interests come out prominently. in this light, a reassessment of “ originate - to - distribute ” models, off balance sheet items and liquidity requirements of banks may warrant a closer examination in regard to banks. moreover, the debate on financial innovation and regulation has to be considered in terms of potential and systematic relevance of such innovations besides the capabilities for bringing them effectively under the regulatory umbrella. the extent of relevance of reputational risks in the conduct of the banking business relative to the past may also be worth considering. fifth, relative to trade in goods, externalities are more prevalent in regard to financial sector, especially the banking sector. hence, some regulation is essential and it tends to be national. however,