Naturally, opinion differs on the appropriate monetary stance at any given time, as uncertainty is a permanent feature of economic life – not only uncertainty about the future, but also about the present and the recent past. 6  BIS central bankers’ speeches
However, performing these activities makes banks vulnerable, in particular receiving short-term deposits and transferring them into long-term loans. At worst, banks may fail and destabilize the whole financial sector and even the whole economy. To avoid such calamities from happening, society is willing, under certain specified circumstances, to rescue banks from failure by providing exceptional lending from the central bank or solidity enhancements from the government. Depositors may be protected by a deposit insurance scheme. But the willingness of the authorities to assist the banks and their customers must be matched by regulation and monitoring to ensure that the bank owners and others do not use, or I might say “abuse”, the possibility of public support to further their own purposes. Hence, there must be some regulation and supervision to make sure that banks behave in ways which are consistent with the overarching goals of society, such as financial stability and consumer protection. Regulation must also provide the necessary incentives for banks to act prudently and in fair competition with other banks and other financial institutions. An adequate level of domestic regulation is also necessary if you want your banks to do business internationally or if you allow foreign banks to do business in India. You should welcome foreign institutions but you should not open your markets to unregulated and unsupervised institutions. Ideally, regulation should be limited to what is really necessary to obtain these overarching goals. In practice, authorities have a tendency to over-regulate since they are risk averse.