developing economies till the global financial crisis unfolded. consequently, global economy got into a recession and global output declined by 0. 5 per cent in 2009. however, global output growth rebounded to 5. 0 per cent in 2010. as the global economy recovered from the worst effect of the global financial crisis, inflation picked up in emerging and developing economies. this was because the global recovery was largely driven by emerging market economies ( emes ) what was termed as a two - speed recovery – a faster growth in emes accompanied by a slower growth in advanced economies. as output gaps closed, there was increasing inflationary pressure in emes, particularly in asia. according to the international monetary fund ( imf ), consumer price inflation in developing asia almost doubled from 3. 1 per cent in 2009 to 6. 0 per cent in 2010 and is projected to be around the same level in 2011. latest data suggest that inflation in rapidly growing brics1 remains elevated ( table 1 ). brazil, russia, india, china and south africa. bis central bankers ’ speeches global factors with recovery, global commodity prices rebounded given the higher level of commodity intensity of growth in emes. there was also an element of financialisation of commodities given the global excess liquidity2. crop loss due to adverse weather conditions in many parts in the world coupled with increased diversion of foodgrains towards biofuel exerted added pressure on global food prices. thus, global commodity prices including food prices rose sharply. for example, the imf commodities index rose by 24 per cent in 2010 on top of an increase of 43 per cent in 2009. it further rose by 20 per cent in december 2010 – april 2011, before moderating by about 2 per cent during june – july 2011. notwithstanding some softening in the last few months, it is important to recognize that the current level of commodity prices is almost double of that two and half years ago ( table 2 ). the increase in commodity prices has affected different countries differently depending on whether they are net importers or exporters of commodities. india being a net importer of commodities, the adverse impact on domestic inflation has been stronger. inflation increased in developing and emerging economies with a combination of closing of output gaps and sharp increase in commodity prices. in this regard, india is not an exception. but the level of inflation in india has been high compared to those in many emes. this suggests that apart while there is disagreement over the role of financial investment in commodity markets

money above the level of comfort of the monetary authorities, there would be concerns around controlling money supply and transmission of monetary policy impulses and may hinder achieving the broader objectives of price stability. therefore, it ’ s not just unqualified, unconditional ‘ credit growth ’ which is crucial for economic development, but ‘ orderly credit growth ’ which maintains and anchors financial stability in system and that in turn ensures sustainable growth over the long term. necessity for regulation of credit market given the size of credit portfolios of financial institutions and the large share which credit risk plays on their balance sheets, it is imperative that any strategy to maintain financial resilience of the institution and financial system stability needs to consider ‘ credit risk ’ as its core element. source : supervisory returns, rbi if we delve a little deeper into the landscape of credit risk, it is apparent that there are three fundamental elements which need to be factored in, namely - ‘ trust ’, ‘ prudence ’, and ‘ contractual arrangements ’ which are also mutually inter - connected. information asymmetry may result in vulnerabilities despite having due contractual arrangements in place which can potentially impede the process of credit intermediation. regulatory frameworks and policies come into play here and our regulatory policies require well thought out frameworks relating to credit appraisal, due diligence, recovery and resolution, in order to overcome this trust deficit or compensate for it in some manner or the other. the policies seek to ensure that the risks associated with lending business are prudentially measured, managed, and provided for. from the perspective of this thematic seminar, let me focus on the ‘ prudential ’ aspect of credit risk management for which we have a principle - based regulatory approach. to describe our approach in an engaging manner, we can call it a 5m framework for risk management which focuses on the following five elements – measuring, monitoring, managing, mitigating, and migrating. the elements of this framework are not mutually exclusive and interact with and relate and reinforce each other. to elaborate : • measurement : peter drucker, the famous management expert once said that “ if you cannot measure it, you cannot manage it ”. i believe this to be a universal principle, and banking regulations around risk management also follows a similar approach. in order to measure the credit risk, all the regulators around the world, including the reserve bank, have prescribed detailed guidelines to enable a proper measurement of the risk. • monitoring