india as a modern economy and an inclusive society. 5. as governor of the reserve bank during 1943 – 49, sir chintaman ’ s intellectual values, progressive outlook, meticulous planning and his ability to think outside the box played a critical role in steering the economy through turbulent waters. i know from personal experience that the job of a governor, more than most other positions, involves managing the tension between doing what is expedient in the short - term and what is good in the medium to long run. by his actions, sir chintaman demonstrated that the dharma of a central banker is always to defend long term sustainability against short term compulsions. 6. i struggled to determine how best to pay a tribute to a person of the intellectual stature and social commitment of sir chintaman. as i read about him, i realized that he was among those who believed in building a modern india based on reevaluating conventional wisdom and finding fresh approaches to old problems, and new answers to old questions. 7. that has a resonance with the situation today as the world is trying to grasp the aftermath of the most devastating financial crisis of our time. the global crisis has challenged many of our ideas and reopened questions that we thought have been settled. in the spirit of paying tribute to the memory of shri deshmukh and his remarkable intellectual traits, i want to raise five old questions and see how the crisis has possibly thrown up new answers. the five questions are : ( i ) have emerging market economies ( emes ) decoupled from the advanced economies? ( ii ) should central banks persist with pure inflation targeting? ( iii ) should financial stability be an explicit mandate of central banks? ( iv ) are controls an appropriate mechanism for managing the capital account? ( v ) has fiscal dominance of monetary policy ended? question 1 : have emerging market economies ( emes ) decoupled from the advanced economies? 8. the answer before the crisis was an increasingly assertive “ yes ”. the decoupling hypothesis held that even if advanced economies went into a downturn, emes would not be affected because of their improved policy framework, robust external reserves and resilient financial sectors. it is difficult to trace the precise origins of the decoupling hypothesis but it would be fair to surmise that it was inspired by the superior growth performance of emes as compared to advanced economies. 9. clearly, differential growth performance by itself is not conclusive confirmation of the decoup

to be able to do so, they need to diversify their drivers of growth, institute automatic stabilizers and develop the fiscal space to accommodate those stabilizers, regulate their financial systems effectively, and be swift and nimble in economic management. question 2 : should central banks persist with pure inflation targeting? 14. the answer before the crisis was an increasingly confident “ yes ”. 15. the years before the crisis saw a powerful intellectual consensus building around inflation targetting. a growing number of central banks, starting with new zealand in the late 1980s and currently numbering over twenty, embraced the principle of gearing monetary policy almost exclusively to stabilizing inflation. even where central banks did not target a precise inflation rate, their policy objectives were informed, if not dominated, by price stability. this approach seemed successful. there was an extended period of price stability accompanied by stable growth and low unemployment. in the world that existed before the crisis, central bankers were a triumphant lot. they had discovered the holy grail. 16. the unravelling of the great moderation during the crisis has diluted, if not dissolved, the consensus around the minimalist formula of inflation targetting. the mainstream view before the crisis was that price stability and financial stability reinforce each other. the crisis has proved that wrong. we have seen that price stability does not necessarily ensure financial stability. indeed there is an even stronger assertion – that there is a trade - off between price stability and financial stability, and that the more successful a central bank is with price stability, the more likely it is to imperil financial stability. 17. where do we in india stand on this? the reserve bank is not an inflation targetter. however, there is an influential view that our economy will be better served if the reserve bank becomes a pure inflation targetter. the argument is that inflation hurts much more in a country like india with hundreds of millions of poor people and that the reserve bank will be more effective in combating inflation if it is not burdened with other objectives. 18. this argument is contestable. inflation targetting is neither desirable nor practical in india, and for several reasons. ( i ) in an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. the reserve bank needs to balance between growth, price stability and financial stability. ( ii ) more often than not, the drivers of inflation in india emanate from the supply side. food