One of the key lessons from the global financial crisis for emerging market economies, including India, is the need to strike a balance between innovation and stability in financial sector reforms, according to a recent report released by the Reserve Bank of India (RBI).

The report on currency and finance, which reflects upon the global financial crisis of 2008 and seeks to draw an objective impact assessment, also pointed to the need to revisit and redefine the role of central banks and highlighted the need for market discipline and supervision to complement each other and the imperative for global economic coordination.

Presenting the report at a seminar organised by the RBI Bank Staff College, Rajiv Ranjan, Director, RBI’s Department of Economic Analysis and Policy (DEAP), pointed out that the newest crisis had been the worst since the great Depression in terms of geographical spread and intensity and the scale of impact global as a result of the enhanced financial linkages.

Pointing to the need to revisit and redefine the role of central banks vis a vis their role in asset markets and as a lender of last resort, the report states that central banks needed to adopt a more flexible approach and strengthen their capacity to provide liquidity and respond to systemic shocks.

"Importantly, the sustained economic recovery would require re-orienting the supervisory approach and strengthening the regulatory and legal framework", Mr. Ranjan said. The reforms under progress in various countries are being worked out on a wide canvas encompassing a revamp of the prudential standards, accounting practices and transparency norms.

In India, the crisis echoed through the channels of trade, financial commodity prices and expectations channels. However, the measures put in place by the RBI and the Government of India since September, 2008, ensured that the Indian financial sector continued to function in an orderly manner, Mr. Ranjan said.

Importantly, unlike the mortgage securities and commercial papers in the advanced economies, in India there was no dilution of collateral Government securities. The Indian experience post-recession also underscores the value of counter-cyclical regulations as an instrument for mitigation of crisis, he said.

It is important for regulators to look at system-wide risk and evaluate the financial system in its entirety and not merely institution-specific risk to ensure complementarity of market discipline and supervision, Mr. Ranjan said.

The RBI report has outlined as important challenges for policymakers the devising of a calibrated exit balancing growth and inflation and resisting direct or indirect protectionist measures to insulate domestic economies.

S.V.S. Dixit, Advisor, DEAP, RBI, said the crisis had put the spotlight of conclaves such as the G20 on balancing financial innovation and regulation.

J. Chandrasekaran, Chief General Manager, SBI, said the impact of the crisis could be contained in India largely due to the counter cyclical measures launched by the RBI.

Nupur Mitra, Director, IOB, Jaya Mohanty, Director, Department of Communications, RBI and Sadakkadulla, Principal, Reserve Bank Staff College also participated.

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