##tors and entrepreneurs should be largely left alone, or whether public policy authorities should be actively involved in regulating those. 13. innovations bring in positive changes in efficiency, productivity, quality, competitiveness, and market share, among other factors. however, as innovations usually result in paradigm shifts, they are typically disruptive. it takes effort and time to understand them. the associated dangers include untested effects, lack of clarity on long term effects, and can lead to misunderstanding and misusing the innovation. innovations can sometimes be bad per se ; sometimes even good innovations can be misused. 14. the world economic forum opines that financial innovation has been more positive than negative and hence it will be better not to regulate them away by imposing excessively harsh standards or outright bans on new products. the forum suggests that let innovation occur ; but react appropriately and quicker to any flaws that become apparent and therefore the tendency should naturally be to err on the side of caution. 15. an oecd report argues that we should preserve the benefits of innovative activities, while ensuring that new products and services that prove harmful are appropriately contained. indian experience 16. how have we been regulating financial innovations in india? the reserve bank has employed several approaches while examining whether a financial innovation should be regulated. they include : i. to ignore bis central bankers ’ speeches ii. to watch out iii. to regulate passively iv. to regulate actively, and v. to ban 17. what determines the approach? i can answer this in a simple, rule of thumb manner as follows : i. can the innovation cause large scale damage ; then ban it. ii. is the size or magnitude very small ; then ignore it. iii. can informed decision be taken by the consumers ; then caution them. iv. can it be beneficial to many consumers ; passively regulate it with light touch regulation. v. can it be beneficial to many consumers, but consumer protection issues loom over ; then actively regulate it. 18. for example, the prize chits and money circulation schemes have been banned, whereas with regard to the virtual currencies like bitcoins, we cautioned the public about the risks involved in dealing with them. we had a studied stance and we preferred to err on caution based on the simplicity or complexity of the product or service. while we said “ yes ” to micro finance, we said “ no ” to complex derivatives. in some other cases, we looked for risk mitigants and

– academics and policy - making. when it comes to core monetary policy issues in my current job, my professional background is clearly something i benefit from. our models and forecasting techniques are quite familiar to me from my former academic life. the way monetary policy has evolved over the past few years towards more transparency and accountability, the role of monetary policy strategies in that respect, and the eminent role of communication has been heavily shaped by academic research. and in most of these issues my academic background provides a solid base to grasp the key issues at stake. however, there are some major aspects of monetary policy decision - making that are not reflected in undergraduate or graduate courses. the most important aspect deals with the analysis of the current stance. the way the multitude of economic data is transformed into a coherent narrative and perspective is something that is not taught at universities. partly, there is good reason for this, as this is a hands - on business where practical experience is inherently essential. but all of us involved in the monetary policy process must try to synthesise a range of disparate information, including official data, anecdotal evidence, and qualitative developments, to construct a “ narrative ” about how the economy is evolving : what forces are determining economic activity now, and what do they suggest for the future? fortunately, before becoming president of the bundesbank, i was a member of the german council of economic experts, better known as the “ five wise men ”. here, i became pretty familiar with the thousands of economic statistics and with the necessary balance between theory and a good dose of judgment in forming an adequate assessment of the current stance of the economy. moreover, my time at the council helped me to shape my thinking about a host of other economic issues, such as social security, labour markets and issues of taxation. this is not to say, however, that my former profession has equipped me with all the knowledge necessary for central banking. central banks cover fields that are far more wide - ranging than the core monetary policy principles just outlined. we deal with financial stability issues, have responsibilities in the banking supervision process, are responsible for the proper functioning of the payment system, distribute cash services to banks, companies and households, and play an important role in international fora like the imf and the different g - settings. here, my learning curve over the past three years has been quite steep. arguably, not every aspect in that regard is equally interesting to me, but my experience since i