The relatively lower presence of foreign banks in the Indian banking sector also minimized the direct impact on the domestic economy. India is exposed to the spill-over effects of the regulatory polices adopted by the systemically important jurisdictions in the World. Volatile cross-border capital flows are one such manifestation.
To the extent that these systemically important jurisdictions harmonize and converge to agreed international best practices, there could be positive externalities from the Indian stand point. The need for convergence in banking regulation stems from the fact that while banking has become global, banking regulation is national. Therefore, addressing the issue of regulatory arbitrage is at the centre-stage of policy concern.