g padmanabhan : evolving regulations and emerging market challenges – the indian context keynote address by mr g padmanabhan, executive director of the reserve bank of india, at the 8th annual conference of the foreign exchange dealers ’ association of india, singapore, 24 may 2013. * * * assistance provided by s / shri g mahalingam, rakesh tripathy, anand prakash and sirin kumar is gratefully acknowledged. 1. it is a pleasure to once again address the practitioners of foreign exchange at this seminar organized by the foreign exchange dealers association of india in the beautiful city state of singapore. let us hope that the events that follow in the indian forex market would be largely different from the events that followed after my last address in this city. the issues that you have flagged for discussion are very topical and therefore i shall comment on each of them. a. global regulatory changes affecting forex markets 2. in the aftermath of the 2007 - 2008 global financial crisis, the regulatory landscape of the financial markets around the world is going through significant changes. the repeal of the glass - steagall act that separated investment banking from commercial banking in the usa in 1999 is considered by many as a major reason that precipitated the global financial crisis. accordingly, several jurisdictions around the world including the us have either already taken or have proposed to initiate steps to construct a firewall between consumer and investment banking. the important initiatives in this direction are the volker rule under the dodd - frank act of the usa ( section 619 of the act ), the independent commission on banking ( icb ) in the uk, headed by sir john vickers and the high - level expert group ( hleg ) on reforming the structure of the eu banking sector, chaired by erkki liikanen. all three models recommend separation between deposit - taking activities and trading / investment bank functions. whilst each regime advocates a ring - fence model, they offer slightly different approaches. let me amplify. 3. volcker rule restricts deposit - taking banks from engaging in proprietary trading, prohibiting them from engaging in more complex activities that are prone to conflicts of interest, in order to safeguard the core of the banking system, i. e. commercial or traditional banking ( deposit taking and lending ). the rule prohibits any banking entity from engaging as principal in short - term trading in securities, derivatives, or commodity futures, i. e. activities that may not be compatible with the risk profile of the banking entities

this broader measure of slack also appears to be less sensitive to gdp growth than traditional measures : it has declined rather less than the reductions in the unemployment rate over the course of the recovery – a broader version of okun ’ s, law if you will. and our analysis suggests that this might help explain why underlying inflation has been so sluggish recently. rerunning our phillips curve models using this broader measure of slack, or equivalently, a measure of “ core ” employment only, leads to the prediction errors for inflation becoming measurably smaller. look at how the gap between actual and predicted inflation largely disappears on slide 5, in particular for the recent history. all this essentially means that it may take longer for inflation to gain steam and wage pressure might only start to rise meaningfully once adjustments in the “ intensive margin ” take hold – that is, once those who want to work more hours also succeed in doing so and once those who are still willing to work, but not currently counted as unemployed, are reabsorbed. indeed, hours worked per employee have not recovered since the double - dip recession. so what is the link between these developments and hysteresis? to be sure, the increasing prevalence of part - time and temporary work reflects several factors – including, in part, important structural reforms in many euro area economies that have helped strengthen the resilience of the euro area. 4 / 9 bis central bankers'speeches yet, the compositional effects we are seeing in the labour market may also reflect more crisisrelated factors, in particular uncertainty about the strength and durability of the recovery and pessimism about the long - term impact of the downturn on growth. as blanchard and co - authors have recently postulated, a revision to future potential growth prospects may cause firms to cut back on investment plans, causing muted growth expectations to become self - fulfilling. 11 on the right - hand side of slide 5 you can see blanchard and co. ’ s analysis replicated for the euro area. and we see signs that such effects might have also been at play in the euro area : there is a positive correlation between potential growth revisions and investment error forecasts. this might suggest that investment, and therefore demand, is influenced by long - term animal spirits – changes in expectations concerning the steady - state path of the economy. but the logic may also run in reverse and create a vicious feedback loop : this would be the case if the pessimism - induced