almost entirely for its own sake and to almost complete exclusion of the larger public policy purpose of sub - serving the hedging needs of the real sector, creating a massive “ financial sector - real sector imbalance ” and, thus, in turn, become the very antithesis of responsible financial innovation. market segmentation continuing market segmentation in india is the biggest undoing of an efficient, deep, liquid, organically connected, and seamlessly integrated financial market which is also a “ sine qua non ” for effective, efficient and instantaneous monetary transmission. market fragmentation / segmentation contributes to price distortion and inefficiency. the most tangible and manifest evidence of market segmentation in india is the “ dis - connect ” between irs, irf and government securities markets as reflected in the irs ( bank credit risk ) yields being 100 to 125 basis points below g - sec yields and irf yields ( when last traded ) being about 70 basis points higher than their fair value, signifying almost complete absence of arbitrage and thus a pernicious violation of the “ no - arbitrage ”, or what is the something as, the “ law - ofone - price, argument ” which, as the discerning audience is by now well aware, is the most fundamental basis of “ fair value derivatives pricing ”. such manifest “ dis - connect ” militates against the development of a seamlessly integrated financial market with coupling and organic connect between all the three! however, this market segmentation can be credibly, effectively and decisively addressed if the nuts - and - bolts reforms propositioned below, which are, if you will, equally also the necessary, and sufficient, conditions, are synchronously orchestrated in all - at - the - same - time - no - piecemeal - and - no - half - way - house manner : ( i ) for the cogent reasons elucidated in the paragraph 7 above, the totally misplaced temptation, and impatience, to introduce / launch cash settled irf must be firmly, and decisively, resisted. for else, this will, to quote jamie dimon, chairman of jp morgan chase, tantamount to “ doing the “ easy ’ and not the ‘ right ’ thing ” and, in the process, replicating an irs genie in the irf / cds markets which then grows so fast so much that it becomes difficult to put it back into the regulatory bottle.

h r khan : understanding psychology for responsible financial behaviour inaugural address by shri h r khan, deputy governor of the reserve bank of india, at the interdisciplinary seminar on psychonomics – understanding the psychology of financial behavior organised by maharshi dayanand college of arts, science & commerce, mumbai, 6 february 2012. * * * the speaker acknowledges the contribution of shri. anand shankar, shri sittikantha pattanaik and shri. surajit bose in preparation of the address. 1. i thank the organizers of the golden jubilee celebrations of the maharshi dayanand college of arts, science & commerce, mumbai for inviting me to deliver the inaugural address at this important seminar. the interdisciplinary seminar on psychonomics : understanding the psychology behind financial behaviour is indeed a very topical subject and especially when the world is realizing the significance of the import of human psychology in the economic behaviour of the markets. it is not often that one gets an opportunity to share thoughts with an enthusiastic group of students and faculty with diverse educational backgrounds and put forth views on psychology in order to explain economics. today, particularly in the context of recent financial crisis, it is well - accepted that psychology does influence many economic decisions which defy pure economic theories. 2. as we all know, during the classical period, economics had an established link with psychology. for example, adam smith, who is considered as father of economics, in his work on the theory of moral sentiments, had described psychological principles of individual behaviour. jeremy bentham, founding father of modern utilitarism ideas, wrote extensively on the psychological aspects of utility. overtime, economists, however, began to distance themselves from psychology as they sought to reshape the discipline as a natural science. by mid - 20th century, psychology lost its linkages with economics. in the 1950s, herbert simons challenged some of the traits of standard economic model of human behaviour, i. e., unbounded rationality, unbounded will - power and unbounded selfishness. he questioned the idea that people have unlimited information processing capabilities. rather he propounded the idea of “ bounded rationality ” to suggest a more realistic conception of problem solving ability of human beings. it was also suggested that human beings struggle to analyse problems objectively as they view them through a “ frame ” of personal experience often shaped by social and cultural bias. in mid 1960s, ward edwards, amos tversky and daniel kahneman began to compare their cognitive