as a whole is spending more than it earns from the rest of the world — a current account deficit. capital is flowing into canada, in various forms, to finance that deficit. the inflows are accommodating the needed economic adjustments that are taking place. the experience of many emerging - market and developing countries has been quite different. many of these countries have, at some time, faced the economic devastation of capital account crises, when sudden halts in foreign capital, often accompanied by capital flight by domestic residents, forces the economy through wrenching adjustments. in such episodes, capital flows take on a life of their own : they become a driver, rather than an enabler, of economic decisions. they can raise significant concerns for both economic and financial stability. in many of these countries, capital flows are seen as driven mainly by external forces, in particular, the monetary policies of the major advanced economies. in the eight years since the global financial crisis, ultra - low interest rates and unconventional monetary policy in the united states, the euro area and japan have created incentives to search for yield, which have led to large surges of foreign investment in many emerging - market economies ( emes ). there are concerns that these flows are not sustainable — that when monetary policies in the advanced economies return to normal, the flows could reverse in a disruptive way, particularly for those emes with weaker domestic fundamentals. we had a hint of that with the “ taper tantrum ” in 2013. 1 in the same vein, over the past week, market interest rates and capital flows worldwide have shifted sharply, along with changing perceptions of the direction of the economic policies of the united states. financial globalization raises another question : can a central bank still conduct an effective monetary policy to fit its own circumstances and objectives? international capital mobility has given rise to a “ global financial cycle ” through which asset prices, longer - term interest rates and capital flows in many countries tend to move together. but long - term interest rates and asset prices are key transmission channels through which monetary policy affects the national economy. if these channels are compromised, policy could become less effective. in canada, we have been living with an open capital account for several decades. but our flexible exchange rate gives us room to conduct an effective the term “ taper tantrum ” refers to how markets reacted in 2013 to comments by federal reserve chairman ben bernanke that the fed might slow down, or taper, the rate of bond

, the reform process was carried forward through analysis and recommendations by various committees / working groups and extensive consultations with experts and market participants. i. special features of the reforms in the financial sector • the reforms were not driven by any banking crisis nor were they an outcome of any external support package. they were undertaken much before the importance of the financial sector to prevent crisis was recognized by international agencies and other countries in early 1990s before the asian financial crisis. • the reforms were carefully sequenced in terms of instruments and objectives. thus, prudential norms and supervisory strengthening were introduced early in the reform cycle, followed by interest rate deregulation and gradually lowering of statutory preemptions. the more complex aspects of legal and accounting measures were ushered in subsequently when the basic tenets of the reforms were already in place. more recently, the regulatory framework has also focused on ensuring good governance through " fit and proper " owners, directors and senior managers of the banks. the preference has been for diversified ownership. • while the focus of the first generation of reforms was to create an efficient, productive and profitable financial services industry, the second phase of financial sector reforms, beginning from the second - half of the 1990s, was aimed at strengthening of the financial system and introduction of structural improvements • the need to prepare the financial system in a more globalised environment and to promote financial stability in the face of domestic and external shocks was on top of agenda of reforms. with increasing globalisation of the indian economy, the reform process witnessed a significant move towards adoption of international best practices in several crucial areas of importance such as prudential norms, banking supervision, data dissemination and corporate governance. • with a view to increasing competition in the banking sector new private sector banks were licensed. a prerequisite for grant of the licence was that these banks had to be fully automated from day one. the results are self - evident as these banks have become hightech banks. this has had a " demonstration " effect on the entire system. the government ownership in nationalized and state bank of india was brought down by allowing them to raise capital from the equity market up to 49 / 45 per cent of paid - up capital. • a unique feature of the reform of public sector banks, which dominated the indian banking sector, was the process of financial restructuring. banks were recapitalised by the government to meet prudential norms through recapitalisation bonds. the mechanism of hiving off bad loans to a separate government asset