% of the investment portfolio, both in the afs and hft categories plus a 2. 5 % risk weight on the entire investment portfolio - whereas basel norms take into account only the trading portfolio. rbi ’ s involvement in basel ii rbi ’ s association with the basel committee on banking supervision dates back to 1997 as india was among the 16 non - member countries that were consulted in the drafting of the basel core principles. reserve bank of india became a member of the core principles liaison group in 1998 and subsequently became a member of the core principles working group on capital. within the cpwg, rbi has been actively participating in the deliberations on the accord and had the privilege to lead a group of 6 major non g - 10 supervisors which presented a proposal on a simplified approach for basel ii to the committee. the basel committee on banking supervision is yet to issue the final basel ii document. the reserve bank ’ s comments on the 3rd consultative document on the new capital accord on the basis of the quantitative impact studies ( qis 3 ) undertaken in co - ordination with select banks has brought out the need for more simplicity and greater flexibility on account of the different levels of preparedness of the banking system in india. policy approach in general, keeping in view the rbi ’ s goal to have consistency and harmony with international standards and our approach to adopt the pace as may be appropriate in the context of our country specific needs, the rbi had in april 2003 itself accepted in principle to adopt the new capital accord basel ii. the rbi has announced, in its annual policy statement in may 2004 that banks in india should examine in depth the options available under basel ii and draw a road - map by end december 2004 for migration to basel ii and review the progress made thereof at quarterly intervals. the reserve bank will be closely monitoring the progress made by banks in this direction. hence, at a minimum all banks in india, to begin with, will adopt standardized approach for credit risk and basic indicator approach for operational risk. after adequate skills are developed, both in banks and at supervisory levels, some banks may be allowed to migrate to irb approach. regulatory initiatives the regulatory initiatives taken by the reserve bank of india include : • ensuring that the banks have suitable risk management framework oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital. the framework adopted by banks would need to be adaptable to changes in business size, market dynamics and introduction of innovative products by banks

. concluding remarks on broader issues the detailed account given above of the developments in the global and the indian financial sector would be incomplete without devoting some attention to the broader issues. these issues need to be reckoned and debated widely lest the response to recent developments be construed as internal to the financial sector, warranting only such sector - specific solutions. first, whether the benefits of financial liberalisation and financial globalisation need to be reevaluated? it is possible to argue that liberalisation of trade in goods has contributed more to growth and price stability than financial sector initiatives. in particular, it may be argued that the incentive frameworks for financial intermediaries appear to be disproportionate to their conceivable contribution to the economy. the arguments in favour of persevering with financial innovation and urging regulators to continue to give priority to facilitate innovations should be viewed in this context. second, whether the regulators have placed greater emphasis on savings of capital in banks rather than on the interests of the depositors and on systemic stability? the recent compulsions for shoring up of capital by some of the global financial institutions in advanced economies seem to suggest this. what induced the regulators to permit such excesses in leverage and savings of capital? does this also involve issues pertaining to governance and accountability of regulators? third, whether there is a beginning of fiscalisation of the financial sector in view of the intensification of the links between the two? for example, the recent episodes of participation of the sovereign wealth funds in the re - capitalisation of banks tantamount to fiscal support. further, large doses of liquidity support to financial markets by regulators against collateral may also involve quasi - fiscal costs, under some circumstances. fourth, whether there is, what may be called, financialisation of the political economy? the attractiveness of financial intermediaries in terms of high profitability, significant growth – especially cross - border, massive spread of investors, and the inadequate scope for application of principles of rules of origin in the financial sector could have resulted in enhanced clout for these intermediaries in the political economy. incidentally, professor jagdish bhagwati ’ s reference to wall street – washington links is relevant in this context. fifth, whether there has been excessive financialisation of corporates, in the sense that large corporates take significant positions in the financial markets through their treasury operations? increasingly, many of the positions of the corporates in