##isation that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend, inter alia, on the soundness of the financial system. this has necessitated convergence of prudential norms with international best practices as well consistent refinement of the technological and institutional framework in the financial sector through a non - disruptive and consultative process. opening up of the capital account the committee on fuller capital account convertibility ( chairman : shri s. s. tarapore ) observed that under a full capital account convertibility regime, the banking system would be exposed to greater market volatility, and this necessitated enhancing the risk management capabilities in the banking system in view of liquidity risk, interest rate risk, currency risk, counter - party risk and country risk that arise from international capital flows. the potential dangers associated with the proliferation of derivative instruments – credit derivatives and interest rate derivatives also need to be recognised in the regulatory and supervisory system. the issues relating to cross - border supervision of financial intermediaries in the context of greater capital flows are just emerging and need to be addressed. basel ii implementation the reserve bank and the commercial banks have been preparing to implement basel ii, and it has been decided to allow banks some more time in adhering to new norms. as against the deadline of march 31, 2007 for compliance with basel ii, it was decided in october 2006 that foreign banks operating in india and indian banks having presence outside india would migrate to the standardised approach for credit risk and the basic indicator approach for operational risk under basel ii with effect from march 31, 2008, while all other scheduled commercial banks are required to migrate to basel ii by march 31, 2009. it is widely acknowledged that implementation of basel ii poses significant challenge to both banks and the regulators. basel ii implementation may also be seen as a compliance challenge. but at the same time, it offers two major opportunities to banks, viz., refinement of risk management systems ; and improvement in capital efficiency. the transition from basel i to basel ii essentially involves a move from capital adequacy to capital efficiency. this transition in how capital is used and how much capital is needed will become a significant factor in return - on - equity strategy for years to come. the reliance on the market to assess the riskiness of banks would lead to increased focus on transparency and market disclosure, critical information describing the risk profile, capital structure and capital adequacy. besides making banks more

led to successive upward revisions to projected inflation, including the medium - term projections. in tandem, second - round effects via wages or mark - ups have been moderate, but the greater persistence of inflation has increased the risks of a deanchoring of medium - term inflation expectations. against this backdrop, the ecb's response has been to tighten monetary policy, combining gradualism and forcefulness in an effort to keep inflation expectations anchored. the normalisation of our monetary policy began in late 2021 with the announcement that net asset purchases would cease by the end of the first half of 2022. subsequently, we have raised the deposit facility rate to 2 %, a cumulative increase of 250 basis points ( bp ), the fastest in the euro's history. we have also created the new transmission protection instrument to ensure the smooth transmission of monetary policy across the euro area. we have amended the conditions of the longer - term refinancing operations, with the specific aim of strengthening the transmission of interest rate increases. and we have announced our intention to stop reinvesting, from early march 2023, all the principal payments from maturing securities under our asset purchase programme, which will give rise to a gradual and predictable reduction in the size of the portfolio. overall, this monetary policy normalisation process has already translated into a significant increase in market interest rates. but what can we expect in the future? at the last governing council meeting we stated that interest rates would still have to rise significantly at a steady pace to reach levels that ensure that inflation will return to its target. as i mentioned earlier, the latest ecb projections forecast inflation of 2. 3 % ( i. e. above the 2 % target ) in 2025. those projections were based on the market expectations for the future path of interest rates when they were prepared. deeming the projections valid, interest rates would therefore need to rise more than the markets expected when they were prepared in order for inflation to return to its target. since the last ecb governing council meeting the maximum interest rate level expected by the market has actually increased by roughly 25 bp, to around 3. 4 %. we 4 / 8 bis - central bankers'speeches must bear in mind, however, that these market rates incorporate a positive term premium. accordingly, the genuine market expectations for the maximum deposit facility rate would be somewhat lower than this figure. in any event, i would like to once again underscore the importance of considering the current setting's extraordinary