way that increased production would be reflected in larger export earnings. secondly, it was argued that given the large domestic market, exports need not be an engine of growth. thirdly, growth in external demand for india's products was likely to be inelastic because of the traditional nature of our exports. finally, there was what was known as the prebisch - singer argument that primary commodity exports face a secular deterioration in the terms of trade. accordingly, exports were regarded as a residual, a vent - for - surplus on those occasions when such surpluses were available. the inward looking industrialisation strategy during the first three plans resulted in higher rate of industrial growth. however, the signs of strain in the balance of payments were clearly visible in the second plan ( see table 1 attached for trends in india's current account ). as the import demand surged on account of development of heavy industries, current account deficit ( cad ) in the second plan surged to 2. 3 per cent of gdp. the difficulties in financing fast growing imports with stagnant exports put considerable strain on reserves as import cover of reserves ( or foreign currency assets ) plunged to barely two months ’ by the terminal year of the second plan. in the third plan, improved export performance and slowdown in import demand led to some improvement in cad and at the same time the financing requirements were met through stepping up of official assistance. the third plan reflected the first signs of rethinking in the policy strategy by dedicating itself to ‘ self sustaining growth ’, which required ‘ domestic saving to progressively meet the demand of investment and for the balance of payment gap to be bridged over ’. while it envisaged that normal capital flows will continue, it set out the early indications of the concept of self reliance by foreseeing a steady reduction in the reliance on special foreign aid programmes and dispensing with them after a period of time. a more liberal view of self reliance evolved over the third plan with a shift in stress from'import substitution'to policy emphasis on'efficient substitution of imports '. however, in reality, until the end of the 1970s, exports were primarily regarded as a source of foreign exchange rather than an efficient means of resource allocation. though the devaluation of 1966 brought to the fore the problems associated with the overvalued exchange rate, it did not bring immediate desired improvement in the balance of payments position. in fact, cad - gdp ratio widened to 2. 0 per

##sight is it now clear that the bis central bankers ’ speeches prolonged period of price stability blindsided policy makers to the cancer of financial instability growing in the underbelly. 12. so that much is now clear. central banks should be mindful of financial stability concerns. but does it necessarily mean that they should take care of it themselves? a review of the pre - crisis institutional arrangements for financial sector regulation across different countries suggests different answers. abstracting from the details, it is possible to see two stylized models. the first is a model where the central bank is just a minder of inflation with no regulatory responsibilities, the rationale being that a central bank will be able to deliver on its price stability objective more effectively if it is not burdened by other responsibilities. the other model is one where a central bank has also some, and in a few cases, the entire responsibility for regulating the financial sector, and hence has an implicit responsibility for financial stability. 13. the experience of the crisis has generated a vigorous debate on whether a central bank can remain immune to financial stability concerns no matter how limited its mandate. using a metaphor which is by now notoriously famous, is the central bank ’ s job confined just to mopping up the mess after the bubble has burst? this is not a totally settled debate, but the dominant view post - crisis is that central banks should have a substantial role in the financial stability function. once again, abstracting from all the nuanced positions, there are three main arguments. ( i ) the first argument is that monetary policy and financial stability are generally interlinked. policies in one dimension have implications for the other. for example, monetary policy can affect systemic risk through the asset price channel. interest rates represent the opportunity cost of holding assets and an accommodative monetary policy can influence credit expansion for financing asset purchases. should this happen in times of excessive optimism, it can lead to asset price bubbles threatening systemic stability. the causation can run in the reverse direction too – policies for financial stability can influence the monetary dimension. for example, as i said earlier, measures aimed at strengthening the resilience of the financial system potentially buttress monetary policy by preventing sharp financial disruptions. this inter - dependency between the two dimensions suggests that the central bank, with inherent responsibility for monetary policy, should also act as a systemic regulator in charge of financial stability. with such a mandate, a central bank can take a holistic view of policy options