duvvuri subbarao : “ central banks must distill lessons from the global crisis and make concrete reforms ” – interview in finance & development interview with mr duvvuri subbarao, governor of the reserve bank of india, in finance & development, 2 july 2010. * * * central banks have been at the heart of the global financial crisis. they have been blamed for policies and actions that got the world into the crisis ; they have been praised for leading the world out of it. both are fair assessments. central banks have been a part of the problem and a part of the solution. as the crisis unwinds and recovery takes hold, central banks face a number of issues, of which i will address five. monetary policy in a globalizing environment the crisis has demonstrated the difficulties of macroeconomic management in a globalizing world. even as governments and central banks acted with an unusual show of policy force, they were unable to get the situation under control because of the interconnectedness of the financial system and the effects, positive and negative, of external developments on domestic policy actions. most important, they found that sentiment and confidence were remarkably correlated across countries. external developments interact with the domestic economy in complex, uncertain, and even capricious ways. central banks have to deepen their understanding of these interactions. some of the channels through which cross - border transmission occurs are quite familiar – global prices, including commodity price movements ; synchronization of business cycles ; capital flows ; strong comovement of asset prices ; exchange rates of key international currencies ; and interest rate policies of major central banks. some of the transmission channels are less familiar. for example, the crisis has shown that even differences in regulatory regimes can trigger arbitrage - based action and dilute the efficiency of domestic policies. take managing capital flows. emerging market economies experienced a sudden stop in capital inflows during the crisis as well as capital outflows – the result of global deleveraging. now the situation has reversed and many emerging market economies again have net inflows. managing these flows, especially if they are volatile, will test the effectiveness of central bank policies in semi - open emerging market economies. a country whose central bank does not intervene in the foreign exchange market will incur the cost of currency appreciation unrelated to fundamentals. if central banks intervene to prevent appreciation, they will have to contend with additional liquidity and potential inflation pressures. if they sterilize

i had a closer interaction with him in my personal and professional capacity very recently. he visited mumbai in march 2005 to attend the sachin choudhury memorial lecture and at that time, i spent almost a full day with him, both in my office and at home. i was deeply impressed by his commitment to issues relating to micro finance. this prompted me to follow it up with a meeting with all people concerned with the micro finance movement involving ngos in andhra pradesh at the reserve bank of india, hyderabad in june, 2005. mr. ray helped in organising this meeting, which gave me a deep insight into the issues involved. in a sense, therefore, mr. smarajit ray was a catalyst for my getting deeply involved in the matters relating to micro finance and thus, both rbi as an institution and i, at a personal level, are, therefore, indebted to him. this first memorial lecture is, thus, our way of acknowledging the inspiration that we derived from his personal conduct and his professional work. considering the deep interest that he had shown during his life time and the relevance of that work to the rbi, i have chosen to speak on the subject of rural banking. after a brief review of the past and recent efforts, the current perceptions on outcomes are noted. i will then mention the national policy directions, followed by, what i would call, new realities. i will conclude the lecture with a few issues that need to be addressed in the days ahead. review of efforts it is useful to recall that rural banking was traditionally a monopoly of the money lenders, till the colonial government enacted co - operative societies act in 1904 with a view to making the cooperatives as premier institutions for disbursement of credit. the process of a three - tier structure commenced in 1915. government was also providing agricultural loans usually called takkavi loans, which have since been discontinued. the rbi act vested a unique responsibility of rural credit to the central bank. all india rural credit survey ( 1951 ) of the rbi opined that the co - operatives were " utter failure " in providing rural credit, but added they had a vital role in agriculture credit. the imperial bank was nationalised as sbi, which was visualised as a vehicle for rural banking. a rural credit survey of 1966 also concluded the ineffectiveness of co - operatives but stressed the importance of their succeeding. many state governments legislated the registration and regulation of money lenders but with little emphasis on implementation. nationalisation