view of the growing integration of the indian economy and the financial system with the rest of the world, it cannot be the case that indian economy should have remained unaffected. the indian economy was collaterally affected primarily through two channels : the capital account and the trade account. while india continued to experience substantial net capital inflows, the situation changed for the worse in september / october 2008 in the wake of lehman brothers ’ bankruptcy, with substantial net capital outflows and this, in combination with widening trade account and current account deficits resulted in the decline of foreign exchange reserves of about usd 60 billion, from usd 316 billion in may 2008 to about usd 255 billion now. the trade deficit widened to usd 120 billion ( 10 % of gdp ) and current account deficit widened to usd 29 billion ( 2. 6 % of gdp ). recent fiscal and monetary policy measures because of the integration with the rest of the world, fall in export demand for indian merchandise and services, the gdp grew by 6. 7 % in 2008 - 09 compared with an average growth of 9 % plus in the previous 3 years. thus, it will be seen that the indian economy was much less adversely affected, primarily due to being driven by domestic demand which again had a very strong rural demand component. significantly, even now the rural demand continues to remain robust, especially for autos, two wheelers, tractors and fmcgs. this was all made possible because of public spending under national rural employment guarantee programme, rural self - employment programme and rural road construction programme under flagship government sponsored schemes. indeed, as a critical complement to this effort, financial inclusion initiative driven by leveraging smart card and bio - metric technology, also played a pivotal role. besides, going forward, with 400 million odd mobile phone subscribers in india, mobile banking has tremendous potential for spreading banking and financial services to rural and semi - urban areas and further economic empowerment of the rural sector. inevitably, the fiscal policy had to respond commensurately and government delivered three fiscal stimulus packages, as a result of which the fiscal deficit rose from 2. 7 % of gdp in 2007 - 08 to 6. 2 % of gdp in 2008 - 09 and is projected to rise to 6. 8 % in 2009 - 10. but, this is not a cause for concern primarily because we need to look at fiscal deficit not in isolation but in conjunction with current account deficit. thus, even though the fiscal deficit is 6. 2 %, the current account deficit at

getting access to all data on the agents while attempting to also give the financial institution enough freedom to articulate the relationship with the agents on their own terms. b. kenya and the philippines, where central banks have had a key role in supporting mobile phone payment schemes and allowed regulatory space to mobile phone operators. in kenya, the e - money transfer service m - pesa offered by mobile network operator safaricom has achieved impressive progress thus far. c. philippines launched the first successful mobile payment service in a developing country in 2004. once market innovation and learning satisfied the needs of regulators and mobile operators, regulation was created and implemented to provide legal certainty and create a level playing field to allow new players. d. bolivia and uganda, which also demonstrated that micro - deposit - taking can flourish in the regulated financial system with timely and appropriate policies. regulators have incorporated non - profit innovators into the formal system by creating legal paths toward a license. new laws, specially designed for previously unregulated ngos, were passed, whereby they will keep their non - profit status and be allowed to collect deposits and offer extra financial services. e. indonesia, which has proved how public - owned financial institutions may become the driving force behind economic development in rural areas. the government owned development bank, bank rakyat indonesia ( bri ), which specializes in microfinance is the biggest provider of rural financial services within indonesia. even when the indonesian banking system collapsed during the asian financial crisis, bri ’ s micro - banking division remained relatively profitable 11. it is, however, important to note all these experiences need to be evaluated in the country specific context and their replication in other jurisdiction has to be carefully thought through. the lesson, however, is that prudential regulation has an important role to play in ensuring the initiatives taken to provide basic financial services do not themselves become a source of risk or fraud. prudential regulations which ensure the soundness of financial institutions providing basic financial services to the excluded, on the one hand, and which put in place robust consumer protection guidelines, on the other, bolster public confidence in the various initiatives taken to ensure greater financial inclusion. if regulations are to foster financial inclusion, they need to be commensurate with risks. a recent bis paper12 highlights the need for regulation of financial innovations for financial stability to be calibrated to the nature and risks of each different service / innovation. in calibrating the regulatory framework for basic financial services according to their