over specific provisions ) will be allowed to be used by banks for making specific provisions for npas during periods of system wide downturn, with the prior approval of rbi. it may be added that the banking system has already exceeded the 70 per cent pcr though some banks have yet to reach that level. bis central bankers ’ speeches 24. by november 2010, the reserve bank had raised the policy rate by 150 – 200 basis points on account of concerns about high and stubborn inflation. during this period, residential property prices had risen sharply and had attained the pre - crisis level. some banks had come out with certain residential housing loan schemes ( teaser loans and 10 : 90 scheme ) where rbi had apprehensions about asset quality going forward. moreover, it was felt that these schemes were creating artificial demand for housing loans which could push up the housing prices further ( which had already reached pre - crisis levels ) with the potential of putting housing beyond the reach of many. in november 2010, therefore, the reserve bank initiated the following measures : ( i ) the provisioning norm for “ standard ” teaser housing loans was increased from 0. 4 per cent to 2. 0 per cent in november 2010 ; ( ii ) for the first time a cap on loan to value ( ltv ) ratio was prescribed at 80 per cent in december 2010 for loans above rs. 2 million and at 90 per cent for loans up to rs. 2 million ; and ( iii ) the risk weight for residential housing loans of rs. 7. 5 million and above, irrespective of the ltv ratio, was raised to 125 per cent. these measures are, however, intended to serve more a microprudential rather than a macro - prudential objective. 25. concluding observations on countercyclical policies ( i ) view regarding the implementation of countercyclical policies was based on tracking of various indicators in the economy, notably the general credit growth and the sectoral credit growth. this was complemented with market intelligence and some feedback from the annual financial inspections of banks. no detailed statistical analysis or modelling was used. the decisions were judgmental based on constant monitoring of macroeconomy and were not rule based. ( ii ) rbi, being the monetary authority as well as the regulator and supervisor of banks, nbfcs and important segments of markets i. e. forex, govt. securities and money markets, had the necessary information and overall view of the risks building up in the system. it was

level of foreign exchange reserves. it is important to note that the first crisis was all our own doing. the foreign currency inflows from the mining and petroleum exports were at their peak, at hundreds of millions of united states dollars per annum. the government of the day decided that we could afford a highly expansionary fiscal regime. the planned budget deficit for 1993 was at 5. 0 to 6. 0 percent of gross domestic product ( gdp ). it was obvious that it was far from being sustainable even in the short term, when the tax flows from mining and petroleum exports were expected to be high. in the medium to longer term it was a recipe for disaster. the public reacted as expected, by loosing confidence in the kina. in 1997 and 1998, the government of the day did nothing to mitigate the economic impact of these shocks. to maintain some resemblance of stability, the central bank used the foreign exchange reserves to support the exchange rate. in spite of heavy intervention in the foreign exchange market, the value of the kina declined at a fast rate, from around us $ 0. 70 in 1997 to $ 0. 34 in less than 2 years to 1999. as was the experience in other countries, currency devaluations do not stop the outflow of foreign currency ; on the contrary it accelerates it. the central bank did not have the independence to rein in the monetary expansion, resulting mainly from a high budget deficit and to be able to stop the pressure on the kina. in 1994, it was agreed that a floating exchange rate is inconsistent with foreign exchange controls. the recommendations were to retain the foreign exchange regulations until the reserves are built up to a comfortable level that can withstand any adverse impact of liberalization of foreign exchange control. in 2000, upon the enactment of the new central bank act ( cba ), the subject was revisited. it was concluded that the foreign exchange controls should stay in place as they are, at least until the central bank has developed appropriate monetary instruments to achieve the objective of price stability. the election driven 2002 budget, and the large built in fiscal deficit, were the first time the central bank could test the instruments it developed, mainly the use of interest rates, to counter - act an expansionary fiscal policy and try to maintain price stability. the other question that we needed an answer to was ; will the public believe that the bank of png is going to use its independence to achieve the objective of price stability. the developments in