are some issues relating to competition in the financial sector and monetary policy, which are worth flagging. first, both efficient markets and successful use of market - based policy instruments, require a strong legal framework and effective implementation. second, competition in the financial sector appears to be a little more complicated than in the nonfinancial sector. for instance, consensus is still lacking on the separation of commercial and investment banking. further, there are differences on issues of commercial affiliations of otherwise ‘ fit and proper ’ owners of banks. this issue was raised in the discussion today and professor monti also felt that it calls for deeper reflection. major issue here is the potential for conflict of interest, in particular, the possible perception of such a conflict of interest in the realm of public opinion in respect of banks, which are highly leveraged with acceptance of uncollaterallised deposits. moreover, banks continue to be viewed as enjoying a special status in the financial sector, especially in the developing economies – which could be construed as unfair competition between banks and non - banks. it is also possible that banks have regulatory burdens disproportionate to their special nature and relative to non - banking intermediaries. third, financial sector competition has two dimensions, namely, amongst the intermediaries and in terms of price discovery in financial markets. here i am deliberately not referring to the fundamental issue raised in the discussions on the address by prof. jacob frenkel on central banks ’ monopoly over domestic money supply, and supply of foreign currency, in some ways. that has been responded to by professor monti and chairman roth has also touched on this aspect in his remarks. fourth, by its very nature or as a matter of current practice in regard to most of the goods and services, the degree of financial sector competition varies across countries. in other words, variability in the degree of competition in the financial sector across economies is perhaps more than those in the non - financial sector. fifth, the increased competition in the financial sector will enhance efficiency and stability, if there is an acceptable minimal degree of competitive efficiency in the product markets and, to some extent, factor markets, supported by some comfort of sound institutions and practices. the markets are mutually reinforcing, but, ideally, the competitive conditions in all the markets need to be broadly in sync and avoid serious mis - alignments with each other. sixth, some of the multi - national banks have assets exceeding the gross domestic product of many large

emerging economies and hence their proper functioning in such emerging markets is critical for genuine competition in financial sector in such economies. seventh, in the context of consolidation of commercial banking, there may be considerable merit in recognising the usefulness of several categories of local banks particularly in larger economies. a classic example of co - existence of large banks with locally active banks is the usa, where regulatory regime enables such possibilities without, perhaps, diluting underlying competitive pressure. now, a few words on the policies to enhance financial sector competition in india : a ) we had, till reforms of early 90 ’ s, an over - regulated, virtually administered financial sector. so, the process of deregulation implied gradual removal of restrictions on the operation of the pricing mechanisms, especially interest rates and statutory liquidity and reserve requirements – a process which is still underway. b ) markets have to be created, nurtured and developed, in the case of financial assets – especially money, forex and government securities. in emerging economies, there are complexities in parallel implementation of measures for both development and integration of domestic as well as external markets in the financial sector, in contrast to being sequenced and spread over a period as it happened in major financial centres. a nurturing policy is necessary for a simple reason. in developed financial centres, each centre evolved over a period in an organic fashion. for developing countries, there are external compulsions which affect the pace and nature of development of markets. this involved, in the indian case, putting in place appropriate policies, institutions, practices, etc., including efficient market infrastructure and robust payment and settlement system. c ) enhanced competition in both banking and non - banking financial sectors has been gradually introduced – through a dynamic mix of public and private as well as domestic and foreign ownership – along with deregulation or adaptive regulations. d ) simultaneously, regulation and supervision of banks, financial markets and infrastructure were improved to increasingly align them with international standards and best practices. to conclude, let me mention four of the implications of enhanced competition in financial sector for our monetary policy. first is the positive impact on both growth and price stability – especially due to the competitive pressures in the banking sector. bank - finance still dominates the financing of the corporate sector, through loans and advances, subscription to corporate bonds as also assisting in overseas operations in several ways, both in trade and investment. second, in view of the enhanced competition, there is a clear evidence of improved monetary transmission mechanism – both