anand sinha : gauging the potential of emerging markets – can growth be achieved with durable financial stability opening remarks by mr anand sinha, deputy governor of the reserve bank of india, at the 2nd ft - yes bank international banking summit, mumbai, 15 october 2012. * * * inputs provided by ajay prakash and yarasi jayakumar are gratefully acknowledged. 1. ms. henny sender, chief correspondent, international finance, financial times and moderator for the panel discussion, my co - panelists, mr. bunt ghosh, head of emerging market strategy for asset management, credit suisse ; mr. sunil godhwani, cmd, religare enterprises ; mr. sizwe nxasana, ceo, first rand group ; dr. rana kapoor, founder, managing director and ceo, yes bank ; other delegates and members of print and electronic media. a very good afternoon to you all. 2. while it is unequivocally agreed that financial stability is an objective that we must all pursue, especially in the light of the lessons learnt from the global financial crisis, the debate continues on how to balance growth and stability, given the fact that pursuit of financial stability may have costs in the nature of foregone growth. in the light of this heightened policy debate, the current panel discussion on “ gauging the potential of emerging markets – can growth be achieved with durable financial stability ” as part of the ft - yes banking summit is very timely and apt. 3. before the panel commences their discussions, let me briefly touch upon a few issues. i. growth vs stability – is there a trade off? 4. the lessons of the global financial crisis have, very clearly, emphasised the significance of financial stability. if policies to ensure financial stability are not pursued, then the growth that comes with credit cycle in the upturn will be more than dissipated when the bust phase comes, with grave consequences for the financial system and macroeconomy in the form of large output losses, lack of growth, rising unemployment, impaired financial markets, weakened banks and financial system, impaired monetary policy transmission and a sense of pessimism. in such conditions, banks become extremely risk averse and do not have the required prudential strength to continue to lend. moreover, with markets not having confidence in financial intermediaries, the funding costs become high. the result is deleveraging or a substantially reduced lending with higher lending rates

a tightening in credit conditions ( in response to threats of a real estate bubble ), a return to a more sustainable pace of public investment, and weaker external demand in advanced economies due to their slowdown. china ’ s surplus, for instance, fell to 2. 8 % of gdp in 2011 from more than 5 % in 2010. china ’ s growth in q2 of 2012 fell to a three - year low of 7. 6 per cent, down from 8. 1 per cent in q1. china ’ s economy continues to weaken, with the industrial sector growing by just over 9 per cent in july, the lowest in three years. india ’ s activity suffered from waning business confidence amid slow approvals for new projects and sluggish structural reforms and policy environment designed to rein in inflation. brazil ’ s economy, in the first quarter of 2012, grew at its slowest pace ( at 0. 2 per cent q - o - q ) in more than two years. brazil has been hit by falling commodity prices and capital outflows, and central and eastern europe, by weak demand in the eu and retrenchment by euro area banks. 17. many of the larger and faster growing edes are close to, or above, potential, which suggests that they will not be able to drive global growth as before. a perceptible shift in the growth strategy of some edes in favour of increase in domestic consumption and demand, entailed significant rise in wage levels which is adding to inflationary tendencies. the scope for policy maneuverability in the edes at present seems to be limited as compared to 2008 – 09. while during the time of global financial crisis, the domestic factors in edes were supportive which encouraged them to put in place monetary and fiscal stimulus measures, the domestic environment in most of the edes during the eurozone crisis is not conducive either because of rising inflation or fiscal tightness or widening current account deficits or combination of all, broadly reflecting the legacy of global financial crisis. coming to the specifics, the edes ’ capacity to provide monetary stimulus is constrained by rising inflationary expectations, and their ability to announce any aggressive fiscal stimulus is limited by the mounting gross public debt. for example, in the depths of the 2008 credit crunch, china made 4 trillion yuan ( us $ 586 billion ) fiscal injection over two years ; and surge in bank credit by 17. 6 trillion yuan helped prop up the global economy.