able to increase their tier 1 capital by an annual average of nearly 30 per cent while their risk weighted assets increased over this period by more than 26 per cent, of which about one fourth has been from internal generation, small amount from government and most of it from the capital markets. assuming the same growth in risk weight assets going forward, and given the average return on capital for the indian banks, raising capital from the markets may not be a problem. given the requirement of basel iii to have common equity as the dominant part of tier i capital, and tier i to be the major part of regulatory capital, and given that indian banks are already well placed in this respect, it would be advisable to retain the advantage even though the new norms will kick in only in a phased manner. forward looking provisioning 7. in a growing economy facing global and domestic shocks, it is likely that npas will increase and the npa ratio could go up and down. the issue, however, is whether the margins on earning assets are sufficient to make adequate provisions for expected losses, apart from generating internal accruals to support growth in the risk weighted assets. in this context, making forward looking provisions as is being considered at the basel level is extremely important for a country like india. while we have asked banks to achieve at least a pcr of 70 per cent for npas, we are also working on a scheme based on the spanish dynamic provisioning model for evolving norms for provisioning for standard assets in different sectors based on time series and cross sectional data. such provisions envisage setting aside profits in good times which can be used in down turn and provide greater comfort from financial stability perspective when the economy is pushing forward for higher growth. lending to infrastructure 8. aspiration for higher growth implies much more investment in infrastructure. needless to say, the headroom available in government finances either at the state or central level for funding or for guarantees ( explicit or implicit ) is limited. this calls for funding from both financial institutions and capital markets, both domestic and external. the single borrower and group borrower exposure limits of banks have already been relaxed to allow for more funding for infrastructure by indian banks. taking into account the concentration risk and asset - liability mismatches, any further relaxation would be imprudent. from regulatory point of view, interest rate derivatives – both otc and exchange traded – have been allowed and these provide the opportunity to hedge the interest rate risk. liquidity requirements on

, based essentially though not entirely, on trade weights. the permissible range for the exchange rate was 2. 25 per cent on either side. the currencies chosen were us dollar, pound sterling, deutsche mark, japanese yen and sdr. the weights were revised in 1979, 1983 and 1984, though the currency composition broadly remained the same with only one change in 1984 when french franc replaced sdr. the band, however, was extended from 2. 25 to 5. 0 per cent in 1979 and from 5 to 10 per cent in 1986. soon after the devaluation of the rupee in july 1991, there was a move in march 1992 to a regime of partial convertibility ( essentially a dual exchange rate ). in march 1993 the regime changed to a uniform exchange rate of the rupee which was market - determined – a system which remains in place to date. in august 1994, india moved over to current account convertibility. from the latter part of 1997, india moved to a cautious and well calibrated move towards capital account convertibility. these developments tested the exchange rate regime which proved conducive to growth while maintaining stability. india has been actively participating in the various initiatives in saarcfinance and acu arrangements. exchange of views and co - ordination in policies through both formal and informal mechanisms have been the main characteristics of co - operation. india ’ s trade links with asia are growing at an unprecedented scale. the stated policy in regard to tariffs is to bring them on par with those of east asia as soon as feasible. policy on free trade agreements with countries in asia, including sapta point to the binding forces of greater integration of india into asia. launching of negotiations of free trade agreements between asean and india is of historic significance for carrying forward asian integration. as part of our policy of communication and to aid researchers and analysts the reserve bank of india has been constructing a five - country and 36 - country indices for nominal effective exchange rate ( neer ) and real effective exchange rate ( reer ). we have decided to review the reer and accordingly we expect a new six - country index to replace the present five - country one. the new index is likely to include the u. s. a., eurozone, the u. k., japan, china and hong kong. the new index would in that case have two new currencies, both asian, namely, the renminbi and the hong kong dollar. the