india ’ s external trade in goods and services as a percentage of gdp is more than that of the united states ( at 48 per cent and 29 per cent respectively ), and is, in a way, indicative of the extent of india ’ s trade integration with the global economy. india is fully convertible on the current account, but we do have requirements of repatriation and surrender of export earnings to ensure that capital account transactions do not take place under the guise of current account. capital account is almost fully open to non - residents, well regulated financial institutions, and corporates. in regard to residents, capital account is almost fully open to resident corporates and partially open to individuals and financial intermediaries. in brief, we partner with the global economy fully on the trade and the current account while there is progressive liberalisation of the capital account, consistent with the progress in reforms in the real, fiscal, and financial sectors. the current turbulence in financial markets and institutions – particularly in the usa, has raised enquiries about the possible contagion. the money, government securities and foreign exchange markets have been stable in india and, in our view, they may not be vulnerable in terms of direct and first - round effects. however, the indian equity markets, which often reflect global trends, have been volatile in the recent months and that has some impact on changing sentiments. we have a bank - dominated financial sector, and banks have a strong capital base. in response to the global developments and the rapid growth in money supply, credit, and asset prices in india, we have since 2004 increased, in regard to banks, the risk weights and the provisioning requirements, and decreased or rationalised the exposure limits to select sectors. these were combined with prudential stipulations on off - balance sheet items and relationships between banks and non - bank finance companies. several safeguards have been built in terms of prudential guidelines and access to repo markets to guard against liquidity - related problems to banks. above all, withdrawal of monetary accommodation commenced in 2004 and has been gradually fine - tuned, remaining sensitive to early signs of overheating, while related prudential measures were addressing exposure of banks to risks in assets. hence, in our assessment, the indian financial sector is likely to be less affected by the contagion than most other emes, in respect of first - round or direct effects. a few words about the state of the indian real economy may be in

system ( treds ) which ought to be a game - changer for meeting the financing needs of micro, small and medium enterprises ( msme ) segment. msmes get squeezed all the time by their large buyers, who pay after long delays. all would be better off if the msme could sell its claim on the large buyer in the market. the msme would get its money quickly, while the market would get a claim on the better rated large buyer instead of holding a claim on the msme. all this will happen as the three trade - receivables discounting systems ( treds ) which the rbi has licensed, start later this financial year. the key is to reduce transaction costs by automating almost every aspect of the transaction so that even the smallest msmes can benefit. with these changes taking place and more yet to come, the roles and responsibilities of the banks need to be underscored. some of the challenges that merit attention are : • does the bank ’ s vision and strategy take into account payment services aspects? are there adequate human resources to project requirements and implement them? • adopting technology is more than automation. it calls for serious efforts at reengineering business processes. workaround solutions do not last long and the price for overhauling the system in the long run may be just too expensive to manage. there has to be a conscious evaluation of process dependencies taking into account customer experience, security issues etc. besides having a long term view of the developments, particularly those of interoperability within and across systems. • despite the huge potential, activation rates and usage levels of various electronic payment services remain at low levels, though growth is picking up. no doubt the fear of taxation as payments move from cash to electronic plays a part in dampening activity. as information technology brings down the possible space to avoid or evade tax, and as the benefits, for example in access to credit, of building verifiable histories of transactions increase, i have no doubt that merchants will push more for electronic payments. some tax benefits to those merchants who show increases in digital transactions, and perhaps innovative ways to encourage customer participation, may be beneficial. for example, service providers could enter every transaction into a high - payout monthly lottery, with a few lucky customers rewarded every month. • at the same time, we should not rule out the possibility that the reluctance to transact is because of the unknown security consequences and costs of using technology. while banks find