a few manufacturing corporates from india are now rated globally best, rbi intends to be similarly the best. needless to say we expect indian accounting profession to be among the world's best, if it is not already so in any specific aspect. many of you would be aware that rbi has been making pro - active efforts to facilitate positioning of international financial standards and codes in relevant areas of the financial system in india. as part of this process and to guide the overall process of implementation of appropriate changes in respect to various segments of the financial system, the rbi had, in consultation with government of india, constituted a standing committee on international financial standards and codes in december 1999. the standing committee, in turn, constituted advisory groups in ten core subject areas pertaining to the financial system, broadly encompassing the key areas prescribed by financial stability forum. out of these, the advisory group on accounting and auditing ( chairman : shri y. h. malegam ) compared the indian standards and relevant statutes with international standards and made recommendations for reducing the gap. in this regard, it is heartening to observe that the accounting and auditing standards in india are being increasingly benchmarked against international standards. i am also happy to note that the icai is making sustained efforts to align the indian accounting standards with the international ones. a review of the recommendations of the advisory group by the reserve bank in december 2004 shows that the gap between international accounting standards and indian accounting standards has been gradually narrowing, reflecting the foresight of the profession in recognising the importance of international comparability. as my remarks would testify, the relationship between the rbi and the icai has been mutually reinforcing, where both can draw on each other ’ s strengths and contribute to an efficient and stable financial system. i am happy to state that we have decided to constitute a small group comprising the representatives of the rbi and the icai who can meet at regular intervals and sort out pending issues relating to standardisation of audit formats, concurrent audit of banks and empanelment of auditors as well as implementation issue on certain accounting standards. before concluding, let me say a few words on the role of auditors in economic reforms. while the reform process had largely emphasised the need for improving the balance sheets, it is very critical that these measures really get reflected in the financial statements and present a true and fair view of the financial position of all entities. the reform process would be evidently incomplete if the balance sheet integrity is not

policymakers proceed down this middle path? first of all, we need to learn - - we need to understand and evaluate the innovations that are taking place in financial markets. this process should include information sharing with other authorities, including those in other nations, in order to benefit from the experiences in other markets and regions. the resulting improved understanding is often enough to prepare policymakers to deal with any breakdowns that do occur and to avoid having the breakdowns turn into systemic problems. the u. s. response to the century date change is an example from a different context that fits into this category. in that case, policymakers worked hard to understand the complex practical issues and to share that knowledge with financial firms. those firms independently evaluated the risks they faced and took appropriate action to manage them effectively. improved understanding may also ease concerns about potential risks. for example, in light of the effects of financial consolidation on the number of firms acting as dealers in the market for dollar interest rate options, the federal reserve became concerned about possible risks to the functioning of that market. these concerns included questions about the adequacy of risk management at the remaining dealers and about the possible effects that problems at one of those dealers could have on its counterparties and market liquidity. however, further investigation by federal reserve staff suggested that market participants were generally managing their market and counterparty risks effectively and that those hedging risk in the options market would not unduly suffer from a temporary disruption in liquidity. our wariness about concentration in this market has not disappeared as a result of our improved understanding, but it has diminished. in general, improved knowledge about financial innovations may prevent the imposition of unwarranted restrictions and is surely a precursor to intelligent regulation in the event it is warranted. a second step for policymakers walking the middle path should be to ensure that market participants have the proper incentives and the information they need to protect themselves from any problems related to new products, markets, or institutions ; by so doing, policymakers can perhaps mitigate those problems. policymakers should insist that regulated firms effectively manage the risks associated with new activities and markets, thereby fostering effective market discipline of risk - taking, including risktaking by unregulated firms. such an insistence generally does not require new regulation but rather is an application of existing regulation in a potentially new context. one of the lessons of the difficulties at long - term capital management ( ltcm ) was that the hedge fund had been able