y v reddy : financial sector competition and monetary policy – comments observations by dr y v reddy, governor of the reserve bank of india, as a panellist at the annual general meeting panel of the bank for international settlements, berne, switzerland, 25 june 2006. * * * mr. chairman, professor mario monti, co - panellists and fellow governors, i am honoured by the invitation to participate in the annual general meeting panel in this historic and beautiful location. when i got the enquiry on my willingness to be a panelist on “ the relevance of competition and monetary policy for financial stability ” for the per jacobsson foundation lecture this year, i initially felt that the topic of the lecture was rather unconventional. but on deeper reflection, the significance struck me immensely. it is a fascinating subject as we realised today after hearing the foundation lecture. i am grateful to professor mario, the “ anti - trust tsar ”, also known as ‘ super mario ’, who is said to be “ politically tone - deaf ”, but tried hard to establish an international network of national competition authorities. my brief comments will be on : a ) the link between competition and monetary policy ; b ) recent developments that reinforce the link, particularly for the developing countries ; c ) some issues relating to competition in the financial sector and monetary policy, especially from the perspective of the developing countries ; d ) indian policies to enhance competition in the financial sector ; and e ) the implications for india ’ s monetary policy. there is a two - way linkage between competition and inflation ; the latter is the major objective of monetary policy. professor monti explained the link and similarities as well as dissimilarities in detail and so i will refer to one aspect only. inflation reduces uncertainties and enhances competition. competition leads to more efficient pricing, which in turn, contributes to low inflation. there is, thus, in some ways, a convergence between the ultimate objectives of both competition and monetary policy. there are three recent developments that reinforce the linkages especially for emerging markets. first, central bankers are increasingly using indirect instruments of monetary policy and are thus, in a way, competitive players in the market, to achieve their objective. second, fiscal rules, which are closely related to monetary policy, operationally require that governments use markets to raise their borrowing requirements. third, increasing liberalisation and global integration of financial systems enhances competitive pressures, amongst major players and instruments, which central bankers cannot afford to ignore. there

report of sweden, we consider that the present swedish law is still not compliant with the requests needed for the swedish central bank to enter the euro. the same of course holds true for the uk. some mixed signals emerged from some accession countries, the most lately being the czech republic and most alarmingly poland. independence of central banks is, as you know, declined at least in two different forms. on the one hand, the independence of the institution, but also the independence of the people working in the institution, the so - called personal independence. the institutional independence has again two functions. one is the operational independence. each central bank must have all the instruments at its disposal and at its free disposal in order to execute all operations related to a central bank's core activity, in particular in the area of monetary policy, foreign exchange, as well as payment systems. on the other hand, i think the financial independence is also increasingly attracting attention. it means that a central bank ought to rely on a robust balance sheet in order to underline its independence. but financial independence also applies to the personal independence of the people running the central bank. i think that as a luxemburger i should not give anyone a lesson in this respect. the treaty has made the ecb responsible and accountable for the maintenance of price stability over the medium term. that is why it also has been shielded from political pressures. medium term price stability should not be sacrificed to meet short - term objectives linked to political and electoral considerations, risking to weaken the stability of the currency. 5. consensus building the second important element in the functioning of the european monetary institutions is the underlying principle of decision - making, namely consensus building. the approach of seeking a broad consensus rather than to resort to voting in my opinion has the following advantages. • it is shielding from pressures arising from national authorities ; • it allows continuous, multilateral check of time consistency and policy direction within the council, thus imposing a discipline on monetary policy and • it is countering any public suspicion that national bias may inform policy decisions. i think this approach has been a key element in the efficient functioning of the governing council of the european central bank up to now. it is representative of an european culture of decision - making which has served us well until now. therefore i think it ought also to be pursued in the perspective of accession countries adopting the euro in the medium term. now finally a word about monetary policy strategy. the monetary policy of the eurosystem,