players is marginal. the instrument available to norges bank for influencing economic fundamentals is the interest rate. if the exchange rate comes under pressure, norges bank can counter this over time by adjusting interest rates. however, we must take into account that in the long run the krone exchange rate cannot deviate substantially from the level implied by economic fundamentals. we must therefore to some extent expect a change in the krone exchange rate in response to major changes in our terms of trade. norges bank ’ s mandate has been formulated in the light of the experience of a fixed exchange rate policy earlier in the 1990s. this experience does not imply that the central bank is to conduct a traditional fixed exchange rate regime, with established fluctuation margins and the obligation to intervene, as reflected in the mandate. norges bank will orient monetary policy ‘ towards maintaining a stable krone exchange rate against european currencies ’. however, it is taken into account that the krone exchange rate will vary. the exchange rate regulation therefore states that ‘ in the event of significant changes in the exchange rate, monetary policy instruments shall be oriented with a view to returning the exchange rate over time to its initial range ’. we must learn from the situation that arose in the autumn of 1996 and winter of 1997 when strong appreciation pressures prompted norges bank to reduce its key rates. norges bank ’ s first response to such appreciation pressures is to provide advice concerning changes in the budget. norges bank will orient its instruments towards maintaining a stable krone exchange rate. we must not allow ourselves to be blinded by daily exchange rate quotations. the experience of recent years shows that norges bank must take into account the fundamental conditions for exchange rate stability over time. the krone is influenced by unrest in international financial markets, changes in oil prices, inappropriate fiscal policy responses and high cost increases peculiar to norway. norges bank cannot fine - tune exchange rate movements through exchange market interventions. this means that the krone exchange rate will fluctuate. it is up to norges bank to evaluate the best means of returning the krone to its initial range. this also means that the bank must exercise a large degree of discretion when using the bank ’ s instruments, essentially the interest rate. in exercising its discretion, norges bank emphasises the fundamental conditions for exchange rate stability. there are two fundamental conditions necessary for achieving stability against european currencies. first, price and cost inflation must fall to the level aimed at by

loans. chart 1 : composition of the central government ’ s public debt bis central bankers ’ speeches sudden stop risk : stable investor base 16. almost entire internal debt ( i. e., more than 90 per cent ) of the central government ( chart 1 ) and all the market loans ( which form more than 90 per cent of internal debt [ chart 2 ] ) have been raised from the domestic bond markets. an important feature of investor profile of the g - sec market is the dominance of domestic investors and limited foreign investor participation. the ability of domestic markets to finance government operations is a source of strength of the debt portfolio which is insulated from the currency risk. this is a consciously adopted policy framework. investment limits for the foreign portfolio investors ( fpis ) have been enhanced in a phased manner to us $ 30 billion in g - sec. the limits are apportioned to different categories of investors with preference towards long term stable investors and investments in longer maturities keeping in view the sensitivity of foreign investors to global macro - economic factors and possible sudden reversals which could potentially impact the systemic stability. participation of foreign investor in the domestic bond markets also needs to be examined in the light of our policy stance relating to calibrated approach to capital account convertibility and the possibility of interest rate and exchange rate volatility due to large scale reversal of capital flows. chart 2 : share of market loans in internal debt 17. the domestic investor base is dominated by banks in short to medium tenor securities and by insurance companies and provident funds at the long end. with the entry of co - operative banks, regional rural banks, pension funds, mutual funds and non - banking finance companies, the institutional investor base has been reasonably diversified ( chart 3 ). there is very little retail participation in the g - sec market as the g - sec market has traditionally been an institutional market. chart 3 : investor profile of g - sec market bis central bankers ’ speeches for diversifying the investor base, especially in context of calibrated reduction in mandated investments in form of statutory liquidity ratio ( slr ), there is need to focus on new investors, such as, pension funds and retail investors. reserve bank has taken several steps to promote retail participation, such as, enabling non - competitive bidding in primary auctions to enable non - institutional investors to participate in auction, introduction of odd lot trading, permitting trading of g - sec on stock exchanges ; mandating retail / mid - segment targets for primary dealers,