Fourth, light touch regulation is the way forward in a “free market” environment where markets self correct in the larger interest and welfare of the economy. Fifth, a set of individual financial institutions constitutes a healthy and robust financial system. The overall policy framework, prior to the crisis, reflected these doctrines.
The policy approach comprised inflation targetting to ensure price and macroeconomic stability and prudential regulatory and supervisory policies focussed on the health and stability of individual institutions. Systemic concerns, especially contagion risks, were sought to be contained through a robust financial infrastructure.