the central bank expended substantial sums in intervening on the foreign exchange market, over isk 40 billion in total, without this sufficing to halt the slide of the krona. at best, it may have slowed the depreciation until the economy had cooled somewhat, and it also contributed to making the inflationary impact of the exchange rate drop less than it would otherwise have been. an article by gerður isberg and þorarinn g. petursson in this february ’ s issue of the central bank ’ s monetary bulletin describes the bank ’ s actions on the foreign exchange market during 2000 and 2001 and assesses their impact. the article concludes definitively that at best the intervention had only short - term effect in each case and the market soon returned to its previous situation. in other words, their conclusion is that intervention on the foreign exchange market against strong prevailing currents has precious little effect unless accompanied by corresponding changes in the domestic interest rates. this is in full accord with the experience in other countries. in recent public discussion the claim has often been made that the exchange rate of the krona is far too high and that the central bank needs to take steps to bring it down again. the fact of the matter is that the bank ’ s means of controlling the exchange rate are overestimated and the power of the market underestimated when the claim is made that the central bank can, through its actions, direct the krona to a specific level. the proposal has been made, for instance, that the central bank cut its interest rates substantially with the aim of lowering the exchange rate. in this context it should be pointed out that the bank has cut its policy rate substantially, from 10. 4 % only a year ago ( 11. 4 % two years ago ) to 5. 3 % at present. the bank ’ s nominal policy rate has not been lower since 1994 and the real policy rate is at its lowest since 1996. the domestic and foreign interest rate differential has narrowed significantly. in addition, the central bank ’ s interest rate is now below the estimated equilibrium interest rate and thus has a stimulating effect on the economy. the impact of interest rate changes generally is only visible after a certain time lag, prompting one to conclude that the effect of the major decrease in interest rates during the past year has yet to be fully felt. as is well known, the exchange rate for the krona plummeted in 2000 and 2001, and for quite some time

finance secretaries of state governments. technology issues the rbi has just commenced a project for complete automation of the operations of rbi ’ s public debt office. it will provide for connectivity between different pdos, and facilitate on - line screen based execution for trade settlement in government securities transactions. the project will be implemented in phases. the first phase will cover the pdo computerisation at mumbai and facilitate screen based negotiated dealings in government securities and money market instruments, tendering of screen based applications in auctions, full - fledged audit trail, debt servicing, information dissemination, price list for open market operations, central information system for access by monitoring and regulatory authorities, etc. it is expected that the first phase will be operationalised well within a year. in the second phase, other regional pdos would be linked with the central pdo system. this phase will facilitate active open market operations of rbi through all regional pdos. the entire project is expected to be operationalised in about a year. the rbi is also separately putting in place a real - time gross settlement system, which is scheduled to be operational within the same time frame. do let us know if you have any suggestions to make in this regard and we will consider them seriously - since close interaction between the public debt offices and pds is very critical. current issues now, i will turn to some other issues that are currently engaging our attention. retailing of government securities the growth in the government securities market has perhaps not been adequately reflected in the depth of the market as the main investors continue to be commercial banks, insurance companies and provident funds. consequently, the retail segment of the market has not developed. while alluding to this issue in my earlier speeches, i had noted that there is an inherent potential for households to diversify their investment portfolio encompassing government securities. with this in view, commercial banks were given the facility of a second sgl account to enable them to hold government securities on behalf of customers in safe custody in demat form. the feedback received is that many large banks with country - wide networks have yet to make this facility available to their branch customers. similarly, not much headway has been made in retailing government stock by nse, nsdl and nsccl, which were also given the facility of a second sgl account. we in rbi are totally convinced that there is need to promote and publicise gilts as an investment instrument and we would greatly appreciate your cooperation in this endeavour. there is scope to reduce the