, therefore, well placed to operate the countercyclical policies. ( iii ) monetary policy and the countercyclical policy were in the same direction ( table 2 ). such a coordinated response was facilitated due to rbi ’ s wide regulatory ambit. if policies are not well coordinated, the costs of implementing such policies may be high. ( iv ) it was important to deal with sectoral exuberance through countercyclical policies even as monetary policy, while dealing with inflation scenario, dealt with generalised exuberance. interest rate alone, being a blunt instrument, would not have been able to handle the sectoral exuberance, or else, the cost to the economy would have been higher. ( v ) combination of risk weights and provisioning requirements for standard assets were used as countercyclical policies. it would appear, however, that varying the provisioning requirements may have been more effective than varying risk weights in moderating credit flow to the specific sectors. this is because, since the average capital adequacy ratio of banks operating in india has been well above 12 per cent for the last many years ( as on december 2010, it was above 14 per cent ), risk weights may not always be effective in dampening the growth of credit as banks can continue to finance riskier sectors yielding higher returns by allowing their capital adequacy ratios to fall by a few basis points and still remain much above the regulatory requirements. to the extent higher risk weights translate into increase in interest rates, demand for credit may come down. on the other hand, varying provisioning requirement would be potentially more effective as it would impact the profit and loss account of banks to which banks are more sensitive. ( vi ) the countercyclical policies were able to dampen exuberant credit growth in the targeted sectors. however, their effect was asymmetrical during downturn. despite aggressive easing of monetary policy and prudential measures in a countercyclical fashion, the credit supply did not increase adequately. the credit growth slowed bis central bankers ’ speeches down substantially due to, among other reasons, subdued credit demand and risk aversion among banks. ( vii ) since the monetary policy and countercyclical policies have operated in tandem, it is difficult to isolate the effect of countercyclical policies from that of monetary policy. dealing with cross - sectional dimension of systemic risk 26. to address systemic risks arising out of inter - connectedness among banks and

) identifying and addressing common exposures, risk concentrations, linkages and inter - dependencies that are sources of contagion and spillover risks that may jeopardize the functioning of the system as a whole2. while the third objective of macroprudential policy [ ( iii ) above ] is concerned with the crosssectional dimension, the first two objectives [ ( i ) and ( ii ) above ] are concerned with the procyclicality issues. the second objective of building defenses, i. e., increasing the resilience of the financial system is viewed as a narrow objective and is attained by build - up of buffers during boom times which can be used when risks materialize during busts. the first objective of dampening the buildup of financial imbalances is considered a broader objective and is essentially “ leaning against the wind ” aspect during the boom phase for dampening the credit imf - bis - fsb ( 2009 ). imf ( 2011 ). bis central bankers ’ speeches and asset price boom. the buildup of buffers should achieve this objective by affecting the cost of credit, though evidence is not unequivocal in this regard. a more ambitious interpretation of the first objective would be moderation of credit supply through both booms and busts i. e. ensuring stable credit supply. while the objective of dampening the credit exuberance during boom and, thereby, moderate credit supply looks plausible, increasing credit supply during busts by leaning against the wind i. e. by releasing buffers, does not seem as plausible because of risk aversion that is likely to set in among banks and other economic agents as well as the market pressure and expectation from banks to maintain high levels of capital when risks are apparently highest. thus macroprudential policy is likely to have asymmetric impact from “ leaning against the wind ” during booms and busts. bcbs and fsb are currently involved in developing a range of macroprudential policies to deal with the procyclicality issues as also with systemically important financial institutions and other aspects of systemic risk on account of inter - connectedness and common exposures. 4. reserve bank of india ( rbi ) has been using macroprudential polices, more notably the countercyclical policies, since 2004 as a toolkit for ensuring financial stability though it had used them sporadically even earlier. it would be useful to describe the broad structure of