against a backdrop of four successive years of surpluses recorded in the current account of our balance of payments and less than buoyant aggregate demand in the economy, the bank faces a policy dilemma. the market is flushed with liquidity for quite sometime. excess supply of foreign exchange has given rise to a situation of excess rupee liquidity. in the last two years the bank of mauritius purchased foreign currencies on the domestic market for an amount equivalent to over us $ 500 million. the rupee counterpart of the purchases amounted to around rs14 billion that has ultimately landed in the balance sheet of the bank of mauritius as well as in the balance sheet of government. the interest burden on this rupee counterpart of the foreign currencies purchased by the bank is indeed heavy. to what extent the bank can keep buying foreign currencies on the market remains a complex policy question should the considered view that the current exchange rate level have to be maintained. given the volatility of exchange rates on the international foreign exchange markets should we take the exchange rate of the rupee as a given price to us ignoring all considerations regarding domestic economic fundamentals? economics textbooks teach us that in a market economy, the invisible hands of the market promote economic efficiency. do we systematically take what the international financial markets decide as given to us despite the common belief that the invisible hands of the market often suffer from arthritis? sometime back a council member of the european central bank likened the behaviour of currency markets to herds that all ran in the same direction. he had this to say, “ i have met a lot of sheep who know they are running in the wrong direction. but they only want to run in the opposite direction if they are certain the rest of the herd will follow. ” the problem is how best the determination of the exchange rate of the rupee in our foreign exchange market reconciles domestic economic fundamentals with what the international financial markets dictate to us. the bank ’ s policy concern is about the need for stemming excessive foreign exchange inflows while sustaining the current exchange rate levels. this is a policy dilemma not only specific to mauritius but also to giant economies like china and others. the bank of mauritius has but only one instrument to strike an appropriate balance and that is interest rate. in the last 30 months the bank of mauritius reduced interest rate on 9 occasions. the lombard rate was reduced step by step from 12. 5 per cent to 9. 75 per cent. the prime lending rates of banks fell

list of systemically important banks and the assignment of those banks to the various surcharge buckets. in both arenas it is important to move as quickly as feasible to complete all this work, so as to provide more clarity to banks, markets, and the public on the details of capital requirements, while still ensuring that the final regulations and requirements are well - crafted. but if details are still lacking, the direction of these reforms is now clear. when fully implemented, these reform strands together will increase significantly the safety and soundness of the financial system and make much less likely the need for some future tarp. at a time when there is considerable disagreement over the best direction for many aspects of financial regulation, that result is one i suspect commands broad support among policymakers, policy analysts, and the public. bis central bankers ’ speeches