possibility of regulatory arbitrage between the entities regulated by banks and non banking financial companies and between the securities regulator and the bank regulator. • need for legal powers to regulate the activities of nbfcs, including framing of guidelines for compulsory registration, stringency in conditions for deposit - taking companies akin to banks, and applicability of prudential norms for such companies. in the recent period, it has been noted that, even if not accepting deposits, these companies can contribute to systemic risk as they access public funds and participate in various markets ( debt, equity and foreign exchange markets ). hence capital ratios and a quarterly system of reporting were introduced for large non - deposit taking nbfcs in 2007. asian crisis of 1997 – the first global contagion the south - east asian crisis started with stock market and currency crashes followed by financial crisis which spilt over to the real sector. it changed irrevocably the way asian countries look at issues of financial stability. the indian market was not immune and even though there was a general belief that some correction in the rupee was required, the pressure on the rupee in later part of the year required rbi to intervene to maintain orderly conditions. withdrawal of funds by foreign institutional investors ( fiis ) hit the equity and foreign exchange markets and the sale of foreign exchange by rbi also affected the money and bond markets. in addition to intervention, monetary and administrative measures had to be taken to stabilise markets. the impact on the domestic interest rates and liquidity was the cost to be paid for restoring stability. the government borrowing programme was managed through private placement and subsequent open market operations when the markets stabilised. the learning points were : • need for complementarity between macroeconomic stability and financial stability and exchange rate management for preserving competitiveness and confidence in the economy. • need for closer supervision and regulation of banks and other financial institutions. • during asset price booms it is important to ensure that banks ’ exposure to capital markets and real estate is not excessive and to understand that banks can be subject to foreign exchange risk even without any currency mismatches in their books, when their constituents have huge unhedged exposures. • management of capital account is important for countries having chronic cad and where inflation and interest rates are persistently over global levels. • dollarisation of the domestic market or internationalisation of the domestic currency can both require careful management. • financial stability emerged as a specific objective of policy as the cost of instability

for sterilising the impact of inflows are important i would like to flag a few critical institutional factors which i think are required to be encouraged and made part of the automatic trigger mechanisms in the system. i would like to turn to these : problem recognition the meaning of being vigilant is to be able to constantly scan the horizon and recognise that a problem is brewing and take pre - emptive action before the problem becomes disruptive. the indicators could be asset values, excess credit growth, large unhedged exposures, continuing current account deficits financed by short term credit, weakly regulated entities in the system, opportunities for regulatory arbitrage, large leveraged positions, prolonged periods of liquidity excesses or shortages ; or the tendencies of entities to leverage, especially by exploiting the inter - linkages in the financial system. committee approach as part of crisis management, it is necessary to have a harmonised approach. first it is essential to have close coordination with the government. as in 1991, this was an important requirement in responding to the recent crisis. putting in place an institutional mechanism and systems that can facilitate continuous dialogue and co - ordination between those in charge of monetary policy, debt management, foreign exchange management, regulation and supervision of banking entities, supervision of non - banking entities, securities markets regulation and the like is a sine - qua - non. within each of these segments it is crucial to be in sync. we have a financial markets committee ( fmc ) in the central bank consisting of senior executives responsible for monetary policy and operations, debt management and foreign exchange reserves management. the fmc meets at least once every day in the morning and emergent meetings are also convened when there are episodes of sharp volatility in equity markets, or when any of the other markets are significantly affected. other regulatory departments including the department responsible for payment system also get involved during such times. the committee keeps in touch with the securities regulator ( sebi ), the stock exchanges especially the clearing and settlement corporation of the exchanges, the clearing corporation of india ltd. ( ccil ) and the like. we also have a crisis management group that meets whenever a crisis is anticipated or occurs. inter - regulatory co - ordination financial sector harmonisation among the securities, insurance, pension fund and bank regulators is enabled through the high level co - ordination committee on financial markets ( hlccfm ). the hlccfm is headed by the governor, rbi and meets as and when