1. 1 Responsible Innovation and Regulation in the Financial Sector Institute for Development & Research in Banking Technology Hyderabad August 2, 2013 Dr. Duvvuri Subbarao Governor Reserve Bank of India 1

2. 2 Impressive Performance by IDRBT Last Five Years Evangelizing IT Strategy to Bank Directors Development of Common Standards for IT Banking Established Unique CISO forum Formidable reputation for the quality of its teaching 2

3. 3 My Topic Today Responsible Innovation and Regulation in the Financial Sector 3

4. 4 What is Responsible Regulation? 4

5. 5 Innovation and Regulation Five Questions (i) In what ways are financial markets different from other markets? (ii) What do these differences imply for responsible innovation and regulation in the financial sector? (iii) Is financial innovation good or bad? (iv) What is the Reserve Bank’s approach to responsible financial regulation? (v) Does financial regulation have a role in promoting equity? 5

6. 6 Innovation and Regulation First Question In what ways are financial markets different from other markets? They are not self correcting They are highly leveraged & interconnected They are procyclical They are reflexive 6

7. 7 Innovation and Regulation Second Question What do these differences imply for responsible innovation and regulation in the financial sector? 7

8. 8 Innovation and Regulation Third Question Is financial innovation good or bad? 8

9. 9 Innovation and Regulation Question: Is Financial Innovation Good or Bad? Answer: Financial innovation is good only as long as it adds value to economic growth and societal welfare 9

10. 10 Innovation and Regulation Fourth Question What is the Reserve Bank’s approach to responsible financial regulation? 10

11. 11 Innovation and Regulation Fourth Question Reserve Bank’s approach to Regulation has been to preserve financial stability, promote consumer protection and develop financial markets. 11

12. 12 Reserve Bank’s Approach to Responsible Regulation Proactive Macroprudential Policy 12

13. 13 Reserve Bank’s Approach to Responsible Regulation Basel III 13

14. 14 Reserve Bank’s Approach to Responsible Regulation New Bank Licenses 14

15. 15 Reserve Bank’s Approach to Responsible Regulation OTC Derivatives 15

16. 16 Reserve Bank’s Approach to Responsible Regulation Futures Market 16

17. 17 Reserve Bank’s Approach to Responsible Regulation Benchmark Rates 17

18. 18 Innovation and Regulation Fifth Question Does financial regulation have a role in promoting equity? 18

19. 19 Innovation and Regulation Five Questions (i) In what ways are financial markets different from other markets? (ii) What do these differences imply for responsible innovation and regulation in the financial sector? (iii) Is financial innovation good or bad? (iv) What is the Reserve Bank’s approach to responsible financial regulation? (v) Does financial regulation have a role in promoting equity? 19

20. 20 RBI Awarded the Dufrenoy Prize in 2012 20

21. 21 Innovation and Regulation Conclusion Regulation and Innovation must go hand in hand Regulation - Responsibility of RBI Innovation - Driving force for IDRBT & banks 21