Its different players are continuously interacting with one another and must adapt to change in order to succeed. In the same way as financial institutions respond to legal constraints, the regulator has to take their reactions into account and set the right incentives to safeguard financial stability.
Firstly, international financial markets do not treat Emerging Market Economies (EMEs) like India as full-fledged market economies but only as economies in the process of marketisation. Hence, financial markets respond differently to the same macroeconomic or political development depending on whether it is an EME or an advanced economy. Hence, EMEs have to follow a more pragmatic and contextual policy.