Gokarn said that from the perspective of policy and regulation, "we should take a view that it places a complementarity between financial activities and economic activities".
He said business risk is reduced when there is a supporting policy framework and the business is driven by some fundamental strength.
Such a situation would be better for businesses than doing things in a wrong kind of environment. All that and when policy environment is not conducive, it will deter investors and financial institutions from putting in money, he said.
"So you have a mismatch between the requirements of the financial sector, the criteria by which finance is allocated or channelised, and the requirements of the real sector," he said.
Gokarn said financial sector should have the ability to innovate around local requirements.
"However, innovation unbridled is a dangerous thing. We know that with the bitter experience of the financial crisis. The balance between regulation and innovation is important," he said.
"We don't want to stifle innovation to the point that there is absolutely no incentive to do it and at the same time, we don't want to push it to the extent where it threatens the financial system," Gokarn added.
