G Gopalakrishna : Reserve Bank of India – Federal Reserve System

1) I extend a warm welcome to the faculty from the Federal Reserve and all the participants of this programme. I am happy to inaugurate the Market Risk Analysis Programme. The periodic programmes involving the Fed Reserve experts have been welcomed wholeheartedly by the participants and we are glad to have another edition of the training programme, with focus on market risk. I hope the participants would be immensely benefited by this programme, just like the participants in the earlier programmes. The programme also comes in the context of the proposed seminal change in the RBI's banking supervision methodology and process this year. I refer to the introduction of the risk based supervision covering nearly half of the commercial banks in the first phase from the ensuing cycle onwards. Focus on risks and tailoring our supervisory stance based on the specific risks in a financial institution would be the cornerstone of the new approach towards banking supervision. In this milieu, there is a need for an enhanced understanding of the major risk categories individually as well from a collective perspective in terms of the interactions among the major risks. 2) It has now come to be accepted that the interconnected world has ensured that the uncertainties in the advanced economies find their way to developing nations through various channels like the trade, finance, commodity price and confidence channels. Critically, the uncertainties are reflected in the volatility of capital flows to emerging market which in turn reflects on the volatility of domestic financial market variables. To understand some indicators of the linkages, we can see that the ratio of India's external trade to GDP has increased four-fold – from 8 per cent of GDP in 1972 to nearly 40 per cent now while the ratio of two-way flow of goods and finance in and out of India to its GDP which incorporates non trade related flows, has increased eight fold over last four decades, from 14 per cent in 1972 to well over 100 per cent now. Apart from linkages with the global developments, there are several domestic factors which are also important in the context of increasing trend of volatility in domestic financial markets such as widening current account deficit, growth slowdown, growing fiscal deficit and sticky inflation, to name just a few. The uncertainty and volatility associated with the financial markets are expected to continue at least for the …