the role of the government, and consequently, it will not be in a position to aid the process of growth, in particular, inclusive growth. re - prioritisation of expenditure may be achieved through reduction or elimination of subsidies and deployment of resources thus released to the more needy sectors. higher level of resources may also be available through reduction in tax exemption. so the whole idea is that, in an economy like ours which requires structural transformation and investment in social and financial infrastructure, we should strive for an appropriate level of fiscal activity particularly because public goods have to be provided and that would enable us to maintain fiscal discipline and macro - stability rather than aim for a mechanical reduction in fiscal and revenue deficits at a lower level of fiscal activity. in the light of financial turbulence across the world in the recent period, the relevance of the fisc in the management of the macro economy has become even more important. when we have not seen such financial turbulence in our country, it is important to remember that when all else fails, it is only the fiscal that has to take the hit and come to the rescue. i would like to read out a sentence from one of the rating agencies and then make my comment, to conclude. it says, “ india ’ s monetary management is conservative and prudent, together with its low external debt position and relative ease in local currency funding, this helps alleviate its fiscal weakness. ” the important point here is if rbi ’ s policy is helping to alleviate fiscal weakness, how can it be conservative? it perhaps needs to be described as “ appropriate ”. this address is dedicated to mr. s. l. n. simha, at whose instance the transcript has been edited for publication. mr. simha, the de facto author of volume one of the history of reserve bank of india ( 1935 - 1951 ), and a highly respected central banker takes lively interest in theory and practice of central banking even at the age of ninety. reserve bank owes a lot to distinguished employees like him for its current status as a respected public institution in india.

##c treasury bills at rates initially on par with 91 - day treasury bills. since july 1974, the adhoc treasury bills were offered at off - market discount rate of 4. 6 per cent which was less than half of the prevailing market rates. there were two immediate consequences. one, when large government deficits were monetised, there was excess liquidity in the system, which prompted the monetary authorities to increase the cash reserve ratio ( crr ) for banks at regular intervals with a view to mop up the excess liquidity. two, to facilitate the central government to borrow comfortably, the monetary authority, which is also the debt manager for the government, periodically increased the statutory liquidity ratio ( slr ) to be maintained by banks. this process went on to an extent that crr and slr, together, pre - empted more than 50 per cent of banking sector liabilities, for a period. in other words, more than 50 per cent of the resources of the banking sector were pre - empted to primarily finance the budget deficits of the governments. further, the deposit and lending rates of banks were, for most part, administered. this situation impacted the health of the banking system and the consequential adjustments during the banking sector reform process were, naturally, somewhat complex. the large fiscal deficit and its monetisation had some spill - over effect on the external sector, which reflected in the widening current account deficit in the late 1980s and early 1990s. triggered by the balance of payments crisis in the early 1990s, when our foreign currency assets depleted rapidly to the extent that it could barely finance just two weeks of imports, we started the reform process in 1991 - 92. a credible macroeconomic structural and stabilisation programme encompassing trade, industry, foreign investment, exchange rate, public finance and financial sector was put in place, which created an environment that was conducive for the expansion of trade and investment. simultaneously, several reform measures towards the marketisation of government borrowings were initiated. at the instance of dr. rangarajan, one of my illustrious predecessors as governor, the rbi entered into the first agreement with the government in 1994 to place a limit on automatic monetisation. the first supplemental agreement between the rbi and the government of india was signed in 1994 setting out a system of limits for creation of ad hoc treasury bills during the three - year period ending 1996 - 97. then in 1997, soon after i moved to the