. 3 per cent at end march 2006, while the net non - performing assets have declined from 4. 0 per cent to 1. 2 per cent during the same period. financial markets development of financial markets received a strong impetus from financial sector reforms since the early 1990s. the reserve bank has been engaged in developing, widening and deepening of money, government securities and foreign exchange markets combined with a robust payments and settlement system. a wide range of regulatory and institutional reforms were introduced in a planned manner over a period to improve the efficiency of these financial markets. these included development of market micro structure, removal of structural bottlenecks, introduction / diversification of new players / instruments, free pricing of financial assets, relaxation of quantitative restrictions, better regulatory systems, introduction of new technology, improvement in trading infrastructure, clearing and settlement practices and greater transparency. prudential norms were introduced early in the reform phase, followed by interest rate deregulation. these policies were supplemented by strengthening of institutions, encouraging good market practices, rationalised tax structures and enabling legislative and accounting framework. ii. a review of monetary policy challenges the conduct of monetary policy has become more challenging in recent years for a variety of reasons. many of the challenges the central banks are facing are almost similar which could be summarized as follows : challenges with globalisation first, globalisation has brought in its train considerable fuzziness in reading underlying macroeconomic and financial developments, obscuring signals from financial prices and clouding the monetary authority ’ s gauge of the performance of the real economy. the growing importance of assets and asset prices in a globally integrated economy complicates the conduct of monetary policy when it is focused on and equipped to address price stability issues. second, with the growing integration of financial markets domestically and internationally, there is greater activism in liquidity management with a special focus on the short - end of the market spectrum. there is also a greater sophistication in the conduct of monetary policy and central banks are consistently engaged in refining their technical and managerial skills to deal with the complexities of financial markets. as liquidity management acquires overriding importance, the evolving solvency conditions of financial intermediaries may, on occasions, get obscured in the short run. no doubt, with increasing globalization, there is greater coordination between central banks, fiscal authorities and regulatory bodies governing financial markets. third, there is considerable difficulty faced by monetary authorities across the world in detecting and measuring inflation, especially inflation expectations. recent experience in regard to

, this remains relevant even today, in fact more today, post crisis. too much of leverage, too much of liquidity, too much of complexity and too much of greed – they all have led to the crisis. it is now being argued that too much of finance is also not conducive to growth. recent studies 8 suggest that while at low levels a larger financial system leads to higher productivity, beyond a point, more banking and more credit result in lower growth. further, it is also argued that fast growing financial sector can be detrimental to the aggregate productivity growth. moderation in approach, therefore, is an important lesson. takeaway 2 : models are not absolute in the run up to the crisis, there was an excessive reliance and almost a blind faith that models convey absolute truths. entire risk management systems were built around this belief. post crisis, participants have woken up to the harsh reality that models do not fully reflect the realities of life and excessive reliance on quantitative models is fraught with risk. exact sciences such as physics are governed by nature ’ s laws that are immutable and lead to definite and predictable results. finance on the other hand, is governed by capricious human behavior and biases which cannot be easily modeled. to an argument that models with all their limitations are better than not having any, nassim taleb has said “ you are worse of relying on misleading information than on not having any information at all. if you give a pilot an altimeter that is sometimes defective he will crash the plane. give him nothing and he will look out the window ” knowing the shortcomings of the models is, therefore, extremely important for their judicious usage. takeaway 3 : finance should serve the real sector and not the converse while it is agreed that financial system furthers the economic development by enabling efficient allocation of capital and risk, the ultimate objective of finance, which is the furthering of economic development should not be lost sight of. in the period prior to crisis, the financial activity grew so much that the umbilical cord between financial and real sectors was severed and the finance started to exist for its own sake. the dangers of such a scenario have been quite emphatically conveyed by the crisis. with these thoughts, i conclude my address. i thank you all for your patient hearing and wish you all the best in your future endeavors. references : acharya, shankar ( 2012 ) “ india - after the global crisis ” cecc