approaches. the question we need to consider is whether there is consistency between the results of the statistical and structural approaches. if not, how do we deal with the divergences? 5. second, in the first stage of the exercise, the criteria applied to the systemically important countries have been more stringent. the screening however has been largely mechanical though, based as it was, mainly on deviations from the mean or median. there has been no analysis, however, to check whether such deviations indeed constitute large and systemic imbalances warranting corrective action. such a mechanical approach, without the application of mind, can lead to anomalies. let me give two illustrations of the type of potential anomalies using india as a case study. 6. large deviations from the mean is the criteria adopted for screening in on the basis of private savings irrespective of whether the country concerned is running a current account deficit or a current account surplus, or its stage of economic development. if, for the sake of argument, such a country was running a current account deficit and adjusted its private savings downwards, it would need to expand its current account deficit and then get screened in by the external imbalance indicators. in india, for example, our growth has been driven by domestic savings. if because of the mutual assessment process ( map ), india was bis central bankers ’ speeches asked to reduce domestic savings, it will increase our dependence on foreign savings, actually adding to imbalances. this would indeed be paradoxical. 7. the second illustration is the treatment of public debt. instead of deviations from the mean / median, what was attempted was deviations from asymmetric reference values for developed and developing countries, with higher thresholds for developed countries. these thresholds are based on historic averages rather than on current assessments of debt sustainability related to expected or projected growth rates. the adjustment period to stabilize the debt is also very backloaded. the year 2030 is long - term enough, and to paraphrase the immortal words of lord keynes, many of us here may well be dead. one reason why the fiscal balance in advanced countries is so important to the global economy is that by virtue of being reserve currency issuing countries their deficits have large spillover effects. 8. there are two issues here. first, there is no justification for using different debt to gdp ratios for advanced countries and emerging and developing countries ( emdcs ). if we take a forward

. this includes about us $ 40 billion liabilities of public sector companies – mainly in the petroleum, railways and power sectors - which have assets with a natural hedge character. besides, being public sector entities, their foreign exchange risk – if any – can be absorbed by the government. such a contingency is unlikely to arise. the remaining us $ 39 billion ecb represents 22 % of the total ecbs outstanding. even this includes borrowings of those companies which have a natural hedge, i. e. earnings in foreign currencies. this would leave a very small portion of the total outstanding ecbs that are truly unhedged. corporate entities eventually face a trade - off : if they hedge their forex exposure completely, the cost of borrowing goes up and the advantage of cheaper borrowing in foreign currency is lost. on the other hand, to the extent they do not hedge, debt servicing can go up when the exchange rate is under pressure. this has led to the concept of the optimal hedge ratio which calculates the proportion of hedging that mimimises the variance of the portfolio. for india, our internal research estimates the optimal hedging ratio at 63 per cent. taking into account natural hedges and the exposure of public sector companies, the optimal hedge ratio condition is comfortably satisfied in the case of the stock of ecbs in india ’ s external debt. 10. due to the rbi actions, including measures to encourage inflows, the movements of the rupee have been relatively smooth and orderly. by eschewing sudden and volatile shifts, we have ensured that expectations remain anchored and the forex market functions in a stable and liquid manner. we will continue to engage with the forex market and ensure that the rupee finds its level in line with its fundamentals. i would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution and we have zero tolerance for volatile and bumpy movements. banks are special – expected to be permanent entities 11. banks are special and not like any other commercial entity. they are not just the custodians of shareholders ’ interest but more fundamentally the trust of the depositors. depositors are at the very core of the banking system. protection of depositors ’ interest is paramount to a robust, reliable and stable financial system in the country. it is important for banks to always remember that the funds they deploy belong to depositors and this should reflect