february 2010 1 that reversed its long held orthodoxy. the note has referred to certain “ circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows ”. now that there is agreement that controls can be “ desirable and effective ” in managing capital flows in select circumstances, the imf and other international bodies must pursue research on studying what type of controls are appropriate and under what circumstances so that emerging economies have useful guidelines to inform policy formulation. exchange rate management 13. just as on capital flows, on exchange rate too, our policy has been consistent which is that we do not target a specific rate or level for the exchange rate. the reserve bank intervenes in the market only to smooth volatility which is harmful to trade and investment. the “ volatility centric approach ” to exchange rate also stems from the source of volatility which is capital flows. despite not having a fully open capital account, we have experienced large volatility in capital flows as the following figures for the external sector for the four years to 2009 - 10 demonstrate. 14. the above numbers show that capital flows were in excess of the current account deficit in the years before the crisis during india ’ s growth boom and that they had abruptly reversed in the crisis year 2008 / 09. the full balance of payments for the just completed fiscal year 2009 / 10 is not yet available but latest data show that the net accretion to reserves was modest. ostry, jonathan d. and others ( 2010 ), “ capital inflows : the role of controls ”, imf staff position note, spn / 10 / 04, february 19, 2010. 15. the above numbers and trends are a demonstration of our policy stance. first, the two way movement shows that we have a flexible exchange rate, and also evidences the increasing flexibility of the rate over time in relation to the magnitude of flows. 16. second, india does not have a deliberate strategy of building up reserves for “ self - insurance ”. the variations in our foreign exchange reserves are an offshoot of our exchange rate policy which is to intervene in the market only to smooth exchange rate volatility and prevent disruptions to macroeconomic stability. third, even as our reserves got built up over the years owing to capital flows, the same reserves have been used to contain volatility in the event of capital reversals. importantly, given our persistent trade and current account deficits, our foreign exchange reserves

education, but without specific encouragement by the government. let me conclude. ck prahalad believed indian business was capable of scaling world heights and so do i. but there are no easy paths to the top. jugaad or “ working around ” difficulties by hook or by crook is a thoroughly indian way of coping but it is predicated on a difficult or impossible business environment. and it encourages an attitude of short cuts and evasions, none of which help final product quality or sustainable economic growth. while we should respect the entrepreneurial abilities of our business people in difficult environments, it is better for us to change the environment for the better. that is indeed what we are trying to do. all this requires patience. the current difficulties of emerging markets stem from a complicated set of reasons, but an important one is impatience to regain growth by overemphasizing old and ineffective methods of stimulus. brazil may have overspent, china may have overinvested. the world is a difficult place. let us recognize we are doing quite well in comparison – indeed, many industries in difficulty have a problem because exports are low or imports are very competitive, and not because domestic demand is inordinately weak. we cannot compensate entirely for what is happening across our borders, else we will risk acquiring the problems our fellow emerging markets have. we have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth where jugaad is no longer needed. for this, we need the bis central bankers ’ speeches understanding and cooperation of business, not impatience and pressure for quick impossible fixes. only then can we realize our true potential as a nation. thank you. bis central bankers ’ speeches