y v reddy : banking and financial sector reforms - status and prospects comments by dr y v reddy, governor of the reserve bank of india, at the panel discussion on “ 15 years of reforms and the road ahead ” convened on the occasion of “ the economic times awards for corporate excellence 2006 - 07 ”, mumbai, 6 october 2006. * * * respected prime minister sir, shri vineet jain, honourable shri chidambaram, dr. rangarajan, shri ahluwalia, leaders of industry and finance, and friends, i am thankful to the organisers for according me the privilege of participating in this panel discussion. my comments are divided into three parts – personal, present status, and prospects for banking and financial sector reforms. on the personal front, i have worked closely with all the distinguished panelists here and hence, would like to publicly acknowledge my deep debt of gratitude. i have been working with dr. manmohan singh, our prime minister, in various capacities, starting in 1977 as his deputy secretary in the finance ministry and more closely since the initiation of reforms. let me be very brief and say that i have always been inspired by his vision and guidance. i am grateful to him for the continued trust in me. i have known montek for about twenty - five years and had worked with him closely for sometime during the reform period. one is inevitably impressed with his sharp intellect and admirable articulation. we have been friends and have deep respect for each others ’ professional abilities. dr. c. rangararjan is my guru – a guru in the true indian tradition. he made me more of an economist than i could ever dream of. the conceptual framework and intellectual as well institutional foundations for the unique and impressive reforms in the monetary - fiscal, financial, and external sectors were laid by him. his successor dr. jalan refined and nuanced the framework not only for taking these reforms forward but also for managing threats to stability. dr. jalan ’ s contribution to exchange rate management is admittedly legendary. i worked with shri chidambaram, initially, when he was the commerce minister and later when he was the union finance minister. we continue to work together closely and it is a delight to have discussions with him knowing fully well that the outcome would be a better policy. shri chidambaram is bold, decisive, and effective. striking examples of these qualities are his decisions relating to gold liberalisation and the introduction of the system of the

external debt though vis - a - vis some of its em peers, india is better placed as can be seen in table 2 below : economic survey 2016 - p 9 – 10, chapter 1 : http : / / indiabudget. nic. in / es2015 – 16 / echapvol1 - 01. pdf. bis central bankers ’ speeches way forward 12. the inter - linkage of indian economy with the rest of the world has been growing at a rapid pace, and therefore, global developments influence the domestic economy in a much bigger way than before. though the spill over effect can take place through multiple channels, it mostly gets transmitted through the commerce or trade channel, through the capital flows channel and through the confidence channel. 13. as stated earlier, the falling exports for a prolonged period is an issue that needs serious attention. what is worrying is the fact that our market shares have fallen from 1. 7 in 2011 per cent to 1. 6 per cent in 2015. the falling crude prices may have helped the country to bring down the current account deficit but once oil prices start recovering, the challenge before the country would be to increase exports if the cad has to be contained on a sustainable basis. a recent imf working paper 2 on price and income elasticity of indian exports has concluded that indian goods exports are sensitive to external demand and to international relative price - competitiveness. manufacturing sector exports are estimated to be more price elastic and sensitive to global demand developments in the short - term. services exports are also not exhibiting buoyant trends with the market share falling from 3. 2 per cent in 2011 – 12 to 3. 1 per cent in 2013 – 14. the prospects of a sluggish global economic recovery may pose challenges for india to achieve significant export growth acceleration in the coming years whereas supply - side constraints could dampen the price responsiveness in the short - term. in the backdrop of uncertain global demand, the challenge for the country would be to search for new markets and new products for existing markets besides addressing the issues relating to competitiveness of indian exports. 14. as we have seen in the past, capital flows are usually susceptible to periodic phases of sudden stops and / or reversals which can put downward pressure on rupee. despite india ’ s relatively stronger fundamentals, the confidence or contagion effect of a global safe haven move could have its impact on the rupee. here the importance of attracting stable flows like fdi needs to be highlighted