so far as cross border transactions ( specially capital account transactions were concerned ). 52. some of the lessons which emerged for policy makers ( from the bop crisis of 1990 – 91 ) were that i ) there were long term benefits of opening the economy both on the current and capital account, albeit in a phased / calibrated manner ; ii ) official capital flows in the form of debt / aid were unsustainable in the long run and therefore required to be replaced with private capital flows ; and iii ). public policy should actively differentiate and provide for preferential treatment between capital flows which are pure equity flows and debt flows ( with fdi, portfolio flows and debt flows in descending order of preference ). 53. the lessons learnt from the bop crisis of 1990 – 91 were subsequently instrumental in framing appropriate public policies for the external sector ( by the government and the central bank ). india became fully convertible on the current account in 1994 ( barring a few quantitative restrictions and a small negative list of transactions { keeping in view larger public interests / good } ) and therefore all current account transactions are freely allowed as long as they are for bonafide purposes and are routed through normal banking channels. 54. on the capital account front, india has been following a calibrated and gradual approach towards full capital account convertibility. this approach is based on the emerging macroeconomic and macro - prudential environment and broadly guided various concomitants2 / indicators such as i ) fiscal consolidation, ii ) monetary policy objectives, iii ) strengthening of the banking system and, iv ) external sector indicators ( cad, adequacy of reserves ). 55. the primary objectives of the extant exchange control regime in india3 are facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in india. on the capital account front there has been a conscious policy effort to give precedence to equity flows over debt flows as well as fdi over portfolio flows. 56. amongst the emerging market economies, india has a peculiar situation where we have a persistent current account deficit which has to be funded from the capital account surplus. while prima facie this should encourage us to move at a faster pace towards full capital account convertibility, a detailed analysis shows that increased and uninhibited capital inflows may ( under certain circumstances ) be more detrimental4 than beneficial to the domestic economy as well as the overall bop position. thus the nature and amount of capital inflows has an

important effect on the overall bop as well as foreign exchange reserves of the country and exchange rate policies have to be suitably tweaked to harvest the beneficial effects of increased capital inflows while at the same time avoid the ill effects of the same. the entire emphasis in our forex management is to reduce reliance on short term flows and not using forex rate mechanism as a tool to manage monetary policy. 57. in conclusion, to quote an african proverb, “ smooth seas don ’ t make for good sailors ”. the aftershocks of the crisis have made supervisors and regulators look inwards report of the committee on fuller capital account convertibility, reserve bank of india, 2006. the foreign exchange regulation act, 1973 was replaced by the foreign exchange management act in 1999. increased capital flows can lead to widening of the cad, appreciation of the domestic currency ( exchange rate appreciation ) as well as the building up of increased inflationary pressures in the domestic economy. bis central bankers ’ speeches and the insights on deficiencies in supervision and regulation is shaping many of the key initiatives in redefining and enhancing effectiveness of regulation and supervision. the seminar, i am sure will help in further evolving and strengthening regulation and supervision of the financial system even in the most turbulent times. i wish the seminar all success. references 1. el - erian, mohamed a. ( 2010 ) : navigating the new normal in industrial countries, per jacobsson foundation lecture, international monetary fund ( imf ), october 10, 2010. 2. financial stability board, november 2, 2010, “ intensity and effectiveness of sifi supervision ”. 3. “ bankers versus basel ”, brooke masters and tom braithwaite, financial times, october 3, 2011. 4. “ financial innovation, regulation and systemic risk, ” presentation at cafral, tarun ramadorai, september 2011. bis central bankers ’ speeches