the likes of the us and the uk. the rupee exchange rate index, meri1 and meri2, which the bank rolled out in 2008, declined steadily since may last year indicating an appreciation of the rupee. at the end of the year, the build - up of supply pressures arising from reduced demand from importers contributed to an acceleration in the appreciation of the rupee against major currencies. the strong rupee was definitely benefiting the consumer in our import - dependent economy but export - oriented enterprises and the tourism sector began to feel the pinch and murmurs of impending massive layoffs became louder. we also observed that the volume of transactions in the foreign exchange market was on the low side compared to the same period in the previous year as forex sellers began to hoard their currency. we actively engaged in discussions with the treasury, the mauritius bankers association, the mauritius exporters ’ association and the association des hoteliers et restaurateurs de l ’ ile maurice to come up with a win - win solution that would neither distort the forex market – nor, for that matter, worsen the excess rupee liquidity which we have also had to reckon with for much of the year. we thus devised a made - to - measure mechanism in the form of short - term foreign currency swaps which we introduced just before christmas to inject liquidity in the market, thereby avoiding the uncertainties that could have had financial stability implications, while also offering the option of t - bills on tap to mop up any resulting excess rupee liquidity. banking sector performance our banking sector emerged virtually unscathed from the global financial crisis. while bank failures made the headlines in other countries, our banks weathered these difficult times without any systemic or institutional failures. banking sector assets declined very slightly by 0. 4 per cent while banking deposits increased by 2. 1 per cent between december 2008 and december 2009. there were no visible signs of credit constraint, as advances increased by 3. 2 per cent over the same period. overall profitability continued at satisfactory levels with a healthy year - on - year growth of 11. 3 per cent posted for the year ended 30 june 2009. our two major domestic banks recorded remarkable profit levels during the past financial year. this is, in my view, a great accomplishment and speaks volumes for the state of our banking industry and for the resilience of the real sector in our country. i cannot keep mum on the recent “ downgrad

##ness may, in our assessment, be less severe than what some press comment would lead one to believe. cheque truncation the bank has embarked on the much - delayed cheque truncation project jointly with commercial banks. the system, upon implementation, will provide a faster clearing cycle for cheques, help combat signature forgery and cheque alteration, while at the same time significantly reducing the cost associated with cheques clearing. financial stability when the bank of mauritius act was amended in 2004, the legislator had already provided that the bank ’ s mandate should be extended to ensuring the soundness and stability of the financial system. in 2007, in fact well before the global financial crisis had unfolded putting at stake the stability of the international financial system, the bank had anticipated rightly that a proper assessment of the risks and vulnerabilities of the financial system would be essential for ensuring its stability and soundness. i created a financial stability unit to provide independent monitoring and analysis of financial stability on an on - going basis. ancillary to this main function was the production of a financial stability report on a bi - annual basis. in the light of our operating experience and in recognition of the need to inculcate a greater awareness of financial stability issues throughout the bank, in august 2009, i decided to put in place a multi - layered structure comprising officers at various levels in other divisions of the bank to develop ownership so that we are better equipped to deliver on this mandate which is new to central banks around the world. furthermore, i channelled significant resources to allow the bank to build capacity in this area to help us fulfil this vital function more efficiently. the bank ’ s balance sheet this year, the bank ’ s balance sheet will reflect the full effect of the systematic and sustained cuts in interest rates by central banks in major economies, in whose currencies our investments are held or denominated. to put things into perspective, i need to go back to early 2008 when the domestic system was submerged by fdi inflows and the bank was forced to intervene in the market to mop up the excess liquidity through the issue of bank of mauritius bills in exchange for foreign exchange assets that we purchased. that is when we first felt the need for dynamic provisioning on account of the very clear “ negative carry ” in these transactions. alas, our pioneering attempt to apply the dynamic provisioning approach had to be abandoned in the midst of much incomprehension and