other res. 12. the third component of resilience for banks and other financial institutions is to be organisationally resilient so that they anticipate risks early and absorb them efficiently. organisations must have the capacity and resilience to protect themselves from adverse incidents and shield their balance sheets. to achieve organisational resilience, res need to continuously evolve by standardising policies, processes, organisational culture and governance. they must also be flexible enough to encourage diverse ideas and innovations within the organisation. pillars of reserve bank's regulatory and supervisory strategy 13. an important element in our strategy of making the indian financial system, including the banking system, future ready is the robust and enhanced regulatory and supervisory framework we have put in place in the last few years. our present approach to regulation and supervision has been built essentially on three pillars. 14. first, one of our focus areas in recent years has been to strengthen governance and assurance functions within the regulated entities. the safety and soundness of the banking system relies critically on effective governance, so that the interest of all stakeholders, especially the depositors, are safeguarded. the essence of good governance is to build an environment of trust, transparency and accountability. depositors, whose money represents an overwhelming part of banks'resources, keep their life savings and hard - earned money with the banks. protection of depositors'money is, therefore, a sacred duty which has to be fulfilled through good governance. there cannot be any compromise on this. the reserve bank is very particular that the regulated entities have systems and processes that promote sound corporate governance. the assurance functions i. e. risk management, compliance and internal audits in banks are critical links between governance and business. assurance functions assist the board as well as the senior management in gauging whether the business operations of the bank or nbfc are being run in conformity with the policies and strategies laid down by the board. the reserve bank has issued detailed guidelines for ensuring quality and independence of the governance and assurance functions. these areas are also subjected to intensive supervisory assessment. 15. second, we have devoted our efforts to identifying and addressing the root causes of the vulnerabilities. many a times, vulnerabilities arise from inappropriate business models adopted by banks and other financial entities. over - aggressive growth strategies or mindless pursuit of bottomlines, for instance, are often a precursor to future problems. while we do not interfere with business decision making, regulated 3 / 6 bis

. to sum up, the surmise from the challenge posed by the growth - inflation dynamics is the following. today ’ s investment is tomorrow ’ s production capacity. india needs to not only reverse the investment downturn but also increase it significantly to raise production to match the growing consumption demand. increase in investment is necessary also to raise production for exports and thereby create jobs at home. making this happen requires a supply response from the government by way of providing public goods and creating a conducive environment for private investment. meanwhile, the reserve bank has to ensure that inflation is brought down to the threshold level and is maintained there. second challenge : mitigating the vulnerability of the external sector 42. over the last two years, india ’ s balance of payments ( bop ) has come under growing pressure as evidenced most clearly by a large and increasing current account deficit ( cad ). the cad last year ( 2011 / 12 ) was 4. 2 per cent of gdp, historically the highest ; the cad during the current year is expected to be even higher. 43. many will recall that india went through a balance of payments crisis in 1991 which, in fact, triggered wide ranging structural reforms that gave a market orientation to the economy. despite india ’ s growing integration with the global economy, the external sector remained robust for over 15 years after that. the current episode of bop pressures, when the cad is higher than it was at the peak of the 1991 bop crisis ( 3 per cent of gdp ) is, therefore, causing apprehensions about whether we have the capacity to stem the pressures and restore the bop to a sustainable path. 44. the increase in cad is quite evidently a consequence of imports growing faster than exports. ( table - 2 ) 45. the increase in imports is largely accounted for by oil and gold imports. to understand the pressure these two items have put on the bop, it is instructive to note the following. net of oil and gold imports, cad last year would have been in surplus of 3. 8 per cent of gdp in contrast to a deficit of 4. 2 per cent of gdp. the surge in gold imports is explained largely by the erosion in real returns on other assets owing to inflation. the reason oil imports have been price inelastic is due to the fact that nearly 60 per cent of petroleum products pass through an administered price regime ; oil demand to that extent does not adjust to price increases. on the other hand, exports were not helped even though the real