subir gokarn : the price of protein inaugural address by dr subir gokarn, deputy governor of the reserve bank of india, at a special conference in honour of dr kirit parikh at the indira gandhi institute of development research ( igidr ), mumbai, 26 october 2010. * * * assistance provided by balbir kaur, praggya das, abhiman das, nishita raje, muneesh kapur, rekha misra and deepa raj is gratefully acknowledged. this address draws upon the ongoing research project in the reserve bank on structural drivers of food inflation in india. introduction it is a great pleasure for me to be speaking at this seminar to celebrate the 75th birthday of prof. kirit parikh. during the time that i spent at igidr under his leadership, i had the opportunity to work on a number of issues, on all of which i received enormous support and encouragement from him, which has continued even after first i and then he moved on to other institutions. my years at igidr provided me firm foundations in individual and collective research as well as teaching and dissemination, which have served me very well in the activities i have been involved in since then. i would like to thank him for his role as a mentor and belatedly wish him a happy 75th birthday. i am glad that in my current position i can contribute to shaping igidr ’ s strategies for the future. if i was asked to describe prof. parikh ’ s approach to research in one sentence, it would be : “ focus on the details, never losing sight of the big picture ”. the balance between micro and macro, between individual drivers and aggregate outcomes, was visible in a lot of the research that was carried out at the institute during my time here and it is an approach that i have found most useful in applied research. since i joined the reserve bank, several colleagues and i have been trying to understand the dynamics of food prices, which have been a major driver of domestic inflation over the past few years. i thought that this seminar would be an entirely appropriate occasion to present some of our analysis of the micro - level price dynamics of specific food items, based on demand - supply fundamentals and then relate this analysis to two very significant “ big picture ” issues. the context when we break down recent food inflation into contributions by different items, a striking feature is the role played by key sources of protein. the dominant

rating the paper issued by the spvs. it has therefore been suggested that ( a ) appropriate mechanisms should be evolved to ensure that the information received by the rating agencies is reliable ; ( b ) appropriate rules - based structures should be established to particularly prevent the conflicts of interest in their functioning ; ( c ) a closer attention to the liquidity risks faced by the rated entity / product should be mandated for the rating agencies in their rating process ; and ( d ) an appropriate road map for the rating agency reforms, should be evolved to address the weaknesses revealed as also to promote competition in the rating industry. 11. as the investors in the securitised paper were apparently unaware of the true quality of the underlying loans, suggestions have been made to improve the transparency of securitisation transactions as also of the characteristics of the underlying loans. mandating a certain degree of standardisation of the securitisation transactions, packages and of the reporting requirements has also been suggested to improve transparency. 12. as i mentioned, one of the causes for the banks ’ distress was the invocation of liquidity support lines by the sivs sponsored by the banks. since unlike the basel i framework, the basel ii framework does require a capital charge for such liquidity support provided by the banks, accelerating and encouraging the implementation of basel ii in all jurisdictions has also been suggested. 13. the financial innovation has transformed the contours of liquidity risks on account of the general trend toward the “ marketisation ” of assets through various securitisation structures, since the imposition of additional regulatory capital charge alone can not be an answer to the liquidity problems faced by the banks, efficient and effective management of liquidity by the banks has acquired crucial significance. hence, suggestions were made for modernising and upgrading international norms for liquidity management, with greater emphasis on simulation, scenario analysis and stress testing of the liquidity needs. the basel committee on banking supervision has since published the principles for sound liquidity risk management and supervision, in june 2008, which provide a good starting point. 14. with progressive marketisation of banking assets, the current accounting standards also increasingly rely on the “ mark to market ” valuation of financial assets. however, the need for a more cautious approach has been highlighted in relying upon such valuations since the recent upheavals seem to have cast a doubt over the reliability of this model when markets are quite thin and shallow, not to mention short - lived. while the essential information