build - up of reserves and domestic liquidity and, at the same time, maintain india ’ s external competitiveness with low inflation and low interest rates. in theory, each of the above alternative approaches has some merit. however, it is not entirely clear that they can be put into practice without causing substantial instability or uncertainty and possible emergence of macro - economic problems which are worse than what they are trying to solve. an implicit assumption in two of the above alternatives is that there is a level at which, after initial fast appreciation, the exchange rate will either stabilise or turn around. a further implicit assumption is that the level ( whatever it is ) is either already known or will become known to the market as it is approached. rbi ’ s past experience does not suggest that these assumptions are valid. it would be recalled that there have been periods when rupee exchange rates have been relatively more volatile and movements have been sharper. however, during periods of sharper appreciation, instead of inflows declining and demand for foreign currency rising, it was noticed that actual market behaviour was the opposite. the opposite was true during periods of sharp depreciation. exchange rate expectations had their own momentum and were often self - fulfilling. there must, of course, be a level where these expectations will reverse. however, if that level, because of “ momentum ” trading in imperfect and thin markets happens to be significantly out of line with “ fundamentals ”, considerable instability and substantial overvaluation ( or under valuation ) may result. such an outcome may do more harm than good to continued confidence in a country ’ s exchange rate system. the third suggestion to hold the rates at current levels, and not to allow it to appreciate any further, even if inflows are strong, is also likely to be unsustainable over any length of time. it virtually amounts to adopting a “ fixed ” or a near - fixed exchange rate system with a floor. past experience suggests that this system can work well, as it did in east asia prior to the crisis, when the economy is doing well and inflows are strong, but it comes under extreme pressure when there are unfavourable domestic or external developments. abandonment of a system of “ fixed ” exchange rates ( or a system with a known floor ) then becomes unavoidable. such a change, when it occurs under pressure, can result in considerable instability which is likely to be spread over a fairly long period. at the end

these intuitively appealing anti - european sentiments did find support – to a substantial degree – among economically disaffected citizens. where are we now? brexit is definitely happening, and it is more and more likely to be a hard one – by which i mean that there will be a complete exit rather than a partial one. the uk and the euwill go their separate ways in march 2019. after we agree on how to separate, we will start to negotiate the terms of our future partnership. at the moment, it is possible that we could start this second phase in december of this year – this is the guidance of the eu council, but for it to happen substantial progress has yet to be made on several fundamental issues such as the rights of eucitizens in the uk after brexit. since negotiations have been going rather slowly, there may be a transition period of two years from 2019 to 2021 – during which the old rules would still apply and the terms of the new partnership could be implemented. what kind of economic partnership this will be has yet to be determined. if we do not find a solution, the eu and the uk will trade under rules set by the world trade organization – which is in nobody ’ s interest, but could be particularly harmful to the uk economy. i hope that all parties involved will be able to negotiate an economic partnership that underscores the close political amity between the uk and the eu. 5. neither less, nor more – but better : reforms are needed brexit shows that less integration is not the solution to the root causes of our economic problems. but a simple case of more integration is not a solution either. one thing should be put first : the eu appears stronger today than it did a year ago. this was reflected by commission president jean - claude juncker ’ s state of the union address on the 13th of september, and in french president emmanuel macron ’ s plan to reform the eu, as set out in his speech on the 26th of september. i agree with them that a strong eu is in the best interest of all europeans and that it can play an important role in international relations. more integration may thus be warranted. but i think that we should get the order right : first reform, then the next steps towards more integration. this is especially true with regard to the european monetary union. the euro area will remain vulnerable, as long as its fundamental stumbling block remains unchanged : its asymmetric 3