##ender confidence in the system. there was also a significant degree of cooperation among the central banks and governments of major economies, which helped to lubricate the system in its functions in times of financial imbalances ( eichengreen, 1992 ). the gold standard, however, came under severe strain after world war i in the wake of the breakdown in cooperation between countries. the consequence was the depression, competitive devaluations, beggar thy neighbour policies, decline in world trade and high unemployment, at different times in different countries during the inter war period. overall, there was a great degree of instability during this period. the quest for a new international economic order that would restore economic and financial stability in the world gave rise to the bretton woods institutions and the bretton woods currency system. it was not until 1958 that most european currencies became convertible and many currency adjustments took place after the end of world war ii. the anchor now was essentially the us dollar as the reserve currency and the commitment to its convertibility to gold. the international monetary fund was to act as the lender of last resort in case of balance of payment crises. but even this fixed exchange rate system lasted only till 1971. the over - financing of exports, the economic pick up in hitherto war torn countries led to the glut of the dollar ; and the american inflation of the 1960s ; all contributed to the cessation of dollar convertibility to gold. the fixed exchange rate system got abandoned after the smithsonian agreement. the floating exchange rates that then followed meant that the world was left without an easily understood, credible monetary anchor. hence the increasing quest for methodologies promoting financial stability. the other major feature of global financial markets has been the trends in capital flows. a major surge in capital flows started around the 1870s and continued till world war i. this era, which coincided with the operation of the gold standard, has been regarded until recently as the golden era of capital mobility. open trade and open labour markets also characterized this period. in retrospect, there was an effective system shut down after world war i, almost until the 1970s. during the inter war period, the world economic system got characterized by increasing trade restrictions, high tariffs, curbs on capital flows, fixed exchange rates and other rigidities. post world war ii it has taken a long time to open up international trade through the successive gatt rounds and now through the wto. the period after 1973 has been

foreign flows to india which in turn caused downward pressure on the indian rupee. the rupee which was hovering around rs. 55 per us dollar in march 2013 depreciated by about 20 per cent and touched a low of ` 68. 4 per us dollar as on august 28, 2013. however, with proactive measures by the government and the reserve bank, the rupee recovered significantly by november 2013 and turned less volatile ( chart 5 ). let me now turn to the specifics of our policy response. policy response during taper talk phase taking into account the spillovers of global developments on indian markets, the reserve bank the government announced various policy measures since june 2013. the policies can be broadly categorized into : ( i ) currency intervention, ( ii ) monetary policy, ( iii ) trade policy and ( iv ) capital flow management measures. a chronology of policy measures is given in annex ii. currency intervention and monetary policy in order to stabilize the domestic currency market, the reserve bank intervened in the forex market by selling dollars during june to september 2013 ( chart 6 ). bis central bankers ’ speeches as the downward pressure on rupee continued despite the initial rounds of intervention in forex market, monetary tightening measures were undertaken to stem speculation by making it expensive to build up long positions in dollars. accordingly, the upper bound of the policy rate corridor ( i. e., msf rate ) was raised by 200 basis points and the quantity of central bank liquidity available through the rbi ’ s overnight liquidity adjustment facility ( laf ) window was restrained. in addition, the level of daily average maintenance of required cash reserve ratio ( crr ) was raised. these had the desired effect of tightening the monetary conditions and raising the effective policy rate sharply to the msf rate ( chart 7 ). bis central bankers ’ speeches in order to signal the transitory nature of these measures and avoid hardening of interest rates at the longer end, a form of operation twist was tried by conducting outright omo purchase of government securities alongside sale of short - term government cash management bills. this inverted the yield curve, though accompanied by some increase in long - term rates. simultaneously, steps were taken to augment foreign exchange reserves. in this regard, banks were incentivized to mobilize fresh non - resident foreign currency [ fcnr ( b ) ] deposits and swap those directly with the reserve bank. the overseas borrowing limit of banks was also increased from 50 to 100 per cent of