vigilance of the factors mentioned are warranted by rbi. we are monitoring ( a ) the process of restoration of full normalcy in global financial markets ; ( b ) the evolving financial contagion ; and ( c ) the possible spill over to the real sector after accounting for the possible extent of “ decoupling ”. the major reason for extraordinary vigilance by rbi is what i would describe as simultaneous volatilities in several globally significant markets, namely, money, credit and currency markets ; asset prices ; and commodity prices, especially oil and food items. the current phenomenon of simultaneous volatilities should be viewed in the context of possible repositioning of the world ’ s dominant reserve currency, involving significant wealth, income and terms of trade effects. similar stresses unlikely in india our banks with overseas presence have confirmed that they have insignificant exposure to the us sub prime mortgage market. some analysts have flagged the prospect of a sort of sub prime lending problem within india also. though there are reports of accelerated emergence of non - performing assets in regard to consumer credit, housing and real estate in a few banks, our preliminary assessment, on the basis of information provided, is that these do not have systemic implications either in terms of solvency or liquidity. there are several reasons why indian banking system may not invite disturbances akin to sub prime. first, pre - emptive monetary policy actions have been taken to address evolving monetary, credit and inflation environment. second, several prudential measures have been taken which include higher risk weights and higher provisioning in respect of sensitive sectors, namely capital market, housing, real estate etc. third, the initial exposure of most banks to the sensitive sectors mentioned above has been very modest. fourth, intensive supervisory review of select banks was undertaken when it was observed that their off balance sheet exposures appeared large or were rapidly accelerating. finally, as part of our regulatory regime in regard to banks and financial markets, there has been what may be termed as “ focus on liquidity ”. recent turbulence in global financial markets was characterized by liquidity issues and there is currently a global debate on the need to focus on liquidity. hence, a more detailed account of our regulatory focus on liquidity is appropriate. regulatory focus on liquidity as you are aware, the overall liquidity in the system is actively managed by the rbi mainly through the operation of laf on a daily basis. however, there are challenges in this regard due to volatility

in capital flows and governments ’ balances. in terms of the evolving global prudential framework, the emphasis has generally been more on capital, as a means of reducing vulnerability to risks, than on prudential requirements for liquidity risk. the issue of liquidity has not been generally addressed in as structured a manner as the issue of capital requirement. aspects relating to liquidity have been largely left to each regulator to assess and prescribe a suitable framework under pillar ii of basel ii. in the indian context, rbi had issued broad guidelines for asset liability management and banks have flexibility in devising their own risk management strategies as per board approved policy. however, in regard to liquidity risks at the very short - end, rbi has taken steps to mitigate risks at the systemic level and at the institution level as well. first, rbi had, early on, recognized the risks of allowing access to the unsecured overnight market funds to all entities and therefore restricted the overnight unsecured market for funds only to banks and primary dealers ( pd ). to enable this phase - out of all non - bank / non - pd participants from the uncollateralized money market, the repo markets – both bilateral repos and collateralized borrowing and lending obligations ( a form of tripartite repos ), were developed. since 2005, the overnight call market is a pure inter - bank market. the impact of this has been that the volumes have shifted from the overnight unsecured market to the collateralized market. second, greater inter - linkages and excessive reliance on call money borrowings by banks could cause systemic problems in two ways. one, if a bank is not able to repay the loan on the due date or the market perceives that the bank is having funding problems it may not be able to continue borrowing in the inter - bank market. if this results in non - payment, the bank which has lent the funds could itself face liquidity problems if it has also borrowed on an overnight basis to lend to this bank. the risk of financial contagion could also arise if other banks in the system that are similarly placed become affected by such concerns. the external costs of failure – the costs that are not borne by the bank and are, therefore, unlikely to be taken into account in its own planning – are therefore greater. the rbi has therefore introduced prudential measures to address the extent to which banks can borrow and lend in the call money market in relation to the