up ” of the manufacturing sector, and most importantly, because of the credit demand that financial inclusion will bring. basel iii requires capital buffers to be built. buffers provide insurance against bad times but they also raise lending costs and may reduce overall lending. moreover, counter - cyclical buffers require judgements to be made on the trajectory of the business cycle and on identification of the inflexion point. wrong judgements can entail huge costs in terms of foregone growth. the challenge for emes will be to contend with the challenge of implementing basel iii, and at the same time ensuring that the hugely expanding credit demand is met at affordable cost. finally let me address the question of – how emerging economies can best cope with volatile capital flows? can macroprudential policies be effective? a clear outcome of the multi - speed recovery has been resumption of capital flows to emerging economies. in order to restore financial stability, advanced economies have assured markets that they will maintain low interest rates over an extended period. and in order to manage expectations, they have repeatedly emphasized that intention. on the other hand, because of their earlier recovery, emes have begun to reverse their crisis triggered expansionary policies much sooner. in india, for example, because of our unique growth inflation dynamics, we raised policy interest rates five times since march 2010. one of the issues that dominate public discourse in india is, in fact, whether the reserve bank has reached neutral levels of policy rates, whatever they may be. the interest rate differentials between advanced economies and emes have naturally triggered capital flows into emes putting upward pressure on their currencies and complicating their macroeconomic management. quite understandably, emes are perturbed. ideally, emes want stable capital flows, and just about enough flows to meet their current account deficits. that remains just that – an ideal. in fact, i have since formulated a law of capital flows which says that “ capital flows never come in at the exact time or in the precise quantity you want ”. to manage capital flows, emes don ’ t have easy options. it is possible, although not terribly efficient, to cherry pick the type of flows. capital controls can be gamed or circumvented. also stop - go policies send wrong signals to potential investors. despite all this, different emes have tried, and will continue to try out, capital controls of both price and quantity varieties. in india

firms to repair their balance sheets at the individual level and for the economies to restore external and internal balances at the aggregate level. in the process, advanced economies will have to contend with structural fiscal deficits, demographic transitions, worsening income distribution and unemployment. a corollary of a low growth scenario, weighed down by domestic concerns, is a less welcoming attitude to globalization. there may not be actually be “ deglobalization ” but the earlier orthodoxy that globalization is an unmixed blessing is being increasingly challenged. the rationale was, and hopefully is, that even as advanced countries may see low end jobs being outsourced, they will still benefit from globalization because for every low end job gone, another high end job – that is more skill intensive, more productive – will be created. if this does not happen rapidly enough or visibly enough, protectionist pressures will arise, and rapidly become vociferous and politically compelling. the wave of currency depreciations that we are seeing around the world is a manifestation of protectionist pressures. going forward, the biggest challenge for emes will be to pursue their growth and development strategies in this evolving world of a “ new normal ” of growth and less welcoming of globalization. to address this challenge, emes will need to make adjustments, most notably by rebalancing from external to internal sources of demand. even for a country like india where growth drivers have been predominantly internal, a lower global demand will hurt exports and the overall growth performance. the second big challenge for emes is going to be to implement basel iii. the broad contours of basel iii – higher and better quality capital, counter - cyclical buffers, limits on leverage and maintenance of minimum liquidity – are all quite familiar and i need not repeat them here. there is also some flexibility for national differences in adoption and implementation by way of a “ comply or explain ” provision. basel iii is undoubtedly well thought through and reflects the lessons of the crisis. however, its implementation comes at a time when emes see their credit demand picking up. india, for example, is the second fastest growing economy in asia but our credit - gdp ratio is the second lowest in asia. non - bank sources of credit and internal savings have kept bank credit growth low. but all this means that there will be a sharp catch up as soon as these sources are exhausted. our credit demand will see rapid expansion because of the investment needs of infrastructure, the “ catch