the reserve bank balance sheet begins from july 1 and ends on june 30. bis central bankers ’ speeches redemption and / or buy back of the treasury bills and / or dated securities issued under the mss. mss securities are indistinguishable from normal treasury bills and government dated securities in the hands of the lender. the payments for interest and discount on mss securities are not made from the mss account, but shown in the union budget and other related documents transparently as distinct components under separate subheads. the ceiling for issuance is fixed of securities under mss is fixed annually through mutual consultation between the government and the reserve bank and indicated in the union budget estimates. the use of mss ( as against central bank bills where the cost is borne by the central bank ) has contributed to the central bank independence since the central bank is not dependent on the government for its recapitalisation in the event of making losses and is, thus able to carry out its monetary policy operations independently. the introduction of mss has succeeded broadly in restoring liquidity adjustment facility ( laf ) to its intended function of daily liquidity management. the mss has served as a very useful instrument for medium term monetary and liquidity management. it has been unwound at times of low capital flows and built up when excess capital flows could lead to excess domestic liquidity. in the face of reversal of capital flows during the recent crisis, mss balances provided a liquidity buffer which could be unwound to ease liquidity conditions and finance the fisc. use of macro prudential tools india like some other emes has by now accumulated a rich experience in the use of macroprudential tools. this has been acknowledged widely including in the ongoing work by the cgfs to develop the framework and standards on maroprudential instruments which i am sure will popularise the use of macroprudential tools the world over. india ’ s experience with the use of macroprudential instruments is unique. while the recently announced basel iii standards lays down counter cyclical capital requirements at the aggregate level, india has used a sectoral approach to contain sharp build up of credit in the housing and real estate sectors by imposing higher risk weights and provisioning norms. the same tool was used in the reverse direction when the boom conditions turned adverse, thus highlighting its feature as a countercyclical tool. to give some examples of our use of macroprudential tools,

use it to talk about issues that have emerged in the post - crisis debates. a stability framework the well - known taylor rule has dominated the analytics of monetary policy over the past two decades. in its standard form, in which the optimal short - term interest rate is a function of both the deviation of the inflation rate from its target and the output / unemployment gap, it accommodates both formal inflation targeting and a more flexible growth - inflation balance as objectives of monetary policy. however, when we look at the range of activities that central banks around the world perform, it is clear that monetary policy is only one of many in the case of most countries. prudential regulation and supervision is also a responsibility in most cases, so at least one dimension of financial stability was already on the charters of many central banks. many of them also managed the balance of payments through active intervention, with both exchange rate and reserve accumulation objectives in mind. looking over this landscape, the point i would like to make is that even as central banks typically pursued multiple objectives, some of which may have been only informally articulated, there was a common theme running through all of them. this was stability. in other words, the core objective of central bank activity along all of the dimensions referred to earlier – price, output, financial sector and external sector – was to preserve stability on that respective dimension. this provides the foundation for what i will call the stability framework. stated in terms of objectives, it covers these four dimensions of central bank activity : the first two components are non - controversial and reflect the formalization of the taylor rule. 1. price stability : minimizing the deviation of the actual inflation rate from a target or benchmark rate 2. output stability : minimizing the deviation of real economic activity from its potential the next two are more difficult to pin down, because they may mean different things in different contexts. also, unlike the first two, which are amenable to a single instrument approach, the next two, besides not being necessarily sensitive to policy rates ( at least in the desired direction ), may need different, even multiple, instruments in different situations. in fact, much of the debate on these objectives revolves around the issues of definition and controllability. given this, for my purpose, i will use rather broad definitions for these two objectives. 3. financial stability : minimizing the risk that the financial system collapses, thereby disrupting economic activity 4. external stability : minimizing the risks