- bills / cmbs of the average month - end stocks need to reviewed as the market has grown significantly during recent years and the prescribed turnover ratios are far too low at present. ( c ) market development ( i ) widen investor base : it is the responsibility of the primary dealers to provide liquidity in government bonds as well as interest rate products. in order to do so, pds need to make efforts to widen the investor base, distribute securities more efficiently and bring in retail and mid - segment investors. reserve bank has imposed targets for retail and mid - segment business, but pds must cultivate the clients as a business opportunity rather than regulatory compulsion. even now certain entities are depending on brokers to buy g - sec at high costs. pds need to expand their reach and pds reluctance to do so in this technology driven era raises fundamental questions relating to their commitment. ( ii ) develop interest rate derivative markets : another aspect of market development is to deal in interest rate derivatives and provide liquidity. as entities dealing in interest rate risk, it is surprising that pds are not active in using the derivatives for hedging and trading. irs market is still dominated by select foreign banks. reserve bank permitted cash settled interest rate futures ( irf ) on 10 - year government of india security with settlement price based on a single benchmark bond after extensive consultations with stakeholders. the irf has received reasonably good response from the market with average trading volume at around rs. 3000 crore. however participation is not widespread as many market participants including pds are yet to start using the product. pds, as expert investors are expected to actively use the available products to hedge. this would perhaps call for pds warehousing more securities for market making. the interest rate risk that this may entail needs to be mitigated through greater participation in the irf market. why this is not happening needs serious soul searching. ( iii ) market intelligence : debt management operations of the sovereign, especially large scale borrowings can be accomplished only with active engagement with all stakeholders. bis central bankers ’ speeches we have been meeting the market participants regularly and exchanging views on several issues such as auction calendar, demand, maturity of instruments, introduction of new products etc. pds have been great sources of information and provided valuable inputs while preparing the auction calendar and introducing products like inflation indexed bonds, interest rate futures etc. we would like to keep the channel of communication free and open. ( iv ) prevention of

on ” and “ off - balance ” sheet items, complex risk models threw up measures of risk that seemed to be quite capable of being absorbed. there was obviously a clear limitation to these models especially in times of stress. the inadequacies stemmed from two perspectives : a. use of past data without adequately factoring in the data from acute periods of stress and b. the presumption that the highly sophisticated mathematical models could be as successful as they are in physical sciences. the latter presumption is clearly wrong inasmuch as financial events are heavily influenced by largely unpredictable or irrational human behaviour which models cannot capture. nevertheless, these are useful when considered as one of the inputs supplemented by stress / scenario analysis and informed judgement. the other aspect which causes serious concern is that the comprehension of these models remains confined to a small group of quants and it becomes very difficult for the top management and boards to comprehend the actual risk undertaken by the organisation. these lessons will have to be kept in view now that some of the banks will move towards advanced approaches. • pricing of risk is important. there is a temptation to under - price risk whenever there is excess liquidity and pressure to generate profits. pricing below cost can be risky and the risk cost is very often not captured adequately. moreover, this gives rise to asset price bubbles with attendant implications. • while credit, market and operational risk are captured in the capital framework under pillar i of basel ii, liquidity risk, concentration risks, strategic risk, reputation risk and risks arising out of securitisation, off balance sheet vehicles, valuation practices need to be recognised. banks ’ boards need to focus on all these risks and set firm wide limits on the principal risks relevant to the banks ’ activities. banks should focus on robust stress testing. compensation packages should also form part of risk management policies. • this crisis has also highlighted the importance of internal controls, good corporate governance and risk management. as shown in the senior supervisors group report on risk management, some banks with strong risk management systems weathered the current crisis much better than many banks that had poor or inadequate risk management systems. • for banks that are part of financial conglomerates, the process of risk management must focus on intra group exposures and transactions as also group wide exposures to sectors and borrowers. • the new element recognised in this crisis is that even while sound risk management policies are observed at the firm level there could be systemic risks over which individual banks have no control and this calls