is longer in developed countries. overall, therefore, in the light of past experience, i think we would be taking an unjustified risk if we deliberately set out to lower the existing regulatory demand for capital. crisis management and payments standstills : i want to turn now from crisis prevention to crisis resolution and from domestic banking to more general international liquidity crises. while the banking system was a source of instability in many countries during the asian crisis, a more immediate problem was the liquidity crisis triggered by the sudden outflow of capital from the region. it is the free movement of capital that i would like to discuss and, in such a regime, the need for arrangements that would deal with a liquidity crisis where developing countries get into payment difficulties. the international capital market global capital flows have exploded since the 1970s. between 1970 and 1996, real gdp in the g7 economies more than doubled. over the same period, world trade volumes rose by roughly twice this amount. but since 1970, real gross private capital flows have risen by a factor of more than eight double the growth in world trade and four times the growth in world income. rising capital flows have delivered huge benefits to the developing countries. capital liberalisation, like trade liberalisation, has facilitated “ catch - up ” in the levels of income of these countries. it delivers a permanent, and potentially huge, welfare gain. the experience of the asian tigers from the 1970s onwards, and before that of germany and japan during the 1950s and 1960s, is testimony to that. but large - scale capital flows also bring risks. capital flows are not just large, but volatile too. the financial crises in mexico in 1994, across south - east asia in 1997, in russia in 1998 and in brazil last year are the most recent and visible examples. but the incidence of financial crisis has in fact been rising since the early 1980s. and the cost of financial crises are considerable. in the stricken south - east asian countries, capital flow reversals and output losses were anywhere between 5 % and 20 % of gdp. in many of these cases, there has been encouraging evidence of a v - shaped recovery in output and asset prices following crisis. but the depth of the v is clear evidence of the potential cost of volatile capital movements. capital markets have of course been prone to “ panics, manias and crashes ” for as long as they have existed. it would be naive to think we can ever entirely prevent crises - and indeed it may be undes

into four phases based on growth - inflation outcome and the rapidly changing monetary policy response : phase i of 5 years of 2003 – 08 of high growth but rising inflation concern towards the later part of the period when repo rate was raised from 6 per cent to 9 per cent and the cash reserve ratio ( crr ) was raised from 4. 5 per cent to 9 per cent. phase ii of 2 years of 2008 – 10 following the global financial crisis when the repo rate was reduced from 9 per cent to 5. 25 per cent and crr was reduced from 9 per cent to 5. 75 per cent. phase iii of 2 years of 2010 – 12 of monetary tightening responding to rising inflation when policy rate was raised from 5. 25 per cent to 8. 5 per cent but crr was reduced to 5. 5 per cent. http : / / rbidocs. rbi. org. in / rdocs / publications / pdfs / idgsr08082013. pdf ( on august 8, 2013 ) bis central bankers ’ speeches phase iv of over a year of monetary easing in 2012 – 13 and 2013 – 14 so far with the repo rate reduced to 7. 25 per cent and crr lowered to 4. 0 per cent ; though since mid - july 2013, the rbi has tightened the monetary and liquidity conditions without changing the policy repo rate and crr to address exchange market volatility. monetary policy stance in any particular phase is generally conditioned by the growthinflation balance, the outlook for growth - inflation in a forward looking context and an assessment of macroeconomic risks. essentially, monetary policy aims at attaining high growth in a non - inflationary manner. but at times high growth in excess of potential growth could trigger inflation putting the sustainability of the very growth path to risks. hence, monetary policy tends to do a careful balancing act so that it is not too accommodative of growth in excess of its potential and at the same time not too stimulative of inflation. however, there could be periods of rising inflation and falling growth below its potential. this could arise from several sources such as the lagged impact of policy stimulus from earlier phases and adverse supply shocks, both domestic and external, which persist. the challenge of rebalancing growth and inflation is evident from the four phases of growthinflation presented in table 1 and chart 1. in the first phase, high growth coincided with low inflation. however