the movement of the indian rupee seems to be broadly tracking the fortunes of the euro against the us dollar – a testimony perhaps to the degree to which global markets are influencing conditions in domestic financial markets ( chart 3 ). before i move to the issue of managing the currency risk, let me briefly touch upon another equally critical macro - economic variable - interest rate that also poses risk to banks and corporates alike and needs to be managed. in contrast to the indian rupee movement, the movement in domestic interest rates ( as represented by the generic 10 - year yield of bonds issued by government of india ) has been range bound ( chart 4 ) with reduced volatility in recent months as compared to the past ( chart 5 ). bis central bankers ’ speeches the trends in interest rate movements have been influenced by a host of factors, such as, policy actions on the rate front and open market operations conducted by the reserve bank, upward revision in fii investment limits in government securities, broadening of investor base for investment in government securities, persistence of inflationary pressure, etc. measures taken by the reserve bank as stated earlier, in the face of increasing volatility in the financial markets and a significant depreciation of the domestic currency, a host of measures have been taken by the reserve bank and the government of india since the beginning of last quarter of 2011. these include, inter alia, the following : i limits on investment in debt securities comprising government securities and corporate bonds by foreign institutional investors were enhanced ; ii. interest rates on rupee denominated non - resident deposits were deregulated while rates foreign currency denominated deposits increased ; iii. the all - in - cost ceiling for external commercial borrowings ( ecbs ) was rationalized ; iv. following administrative measures aimed at discouraging speculative activities were initiated : a. reduction in limits for booking forward contracts under past performance route and only on fully deliverable basis ; b. forward contracts once cancelled cannot be rebooked ; c. net overnight open position limits ( noopl ) of the authorized dealer ( ad ) banks were reduced across the board ; and d. ad banks were advised that their intra - day open position / daylight limit should not exceed the existing noopl approved by the reserve bank ; v. interest rate on export credit in foreign currency was deregulated ; vi. foreign exchange earners were asked to convert 50 per cent balances in their exchange earners foreign currency ( eefc ) accounts

, of course, taken a series of measures to address many of the challenges in the recent weeks. given very limited role that we can play in influencing the global environment characterized by frequent bouts of risk - on / risk - off sentiments, i would like to touch upon the changing scenario in domestic financial markets and its implications for currency and interest rate risk bis central bankers ’ speeches management. thereafter, i would briefly touch upon the challenges these developments pose for banks and corporates and what lessons can be learnt. currency and interest rate risk in the indian context after remaining stable for nearly two years, the indian rupee started depreciating very sharply last year immediately after the credit rating of the us was downgraded by the s & p. as compared to an appreciation of 1. 1 per cent during 2010 – 11, the indian rupee fell by more than 12 per cent during 2011 – 12 ( chart 1 ). the downward pressure on the indian rupee was also marked by heightened volatility. a sharp depreciation within a short period of time had a destabilizing impact on the general market sentiment. as may be seen ( chart 2 ), the indian rupee was relatively less volatile till july 2011 but the level of volatility increased significantly thereafter. there was some moderation in volatility after a series of policy measures were announced by government of india and the reserve bank of india during last quarter of 2011. these measures were aimed at augmenting capital flows and imposing certain restrictions on banks and corporates in order to curb speculative uni - directional bets on the indian rupee by such entities. apart from taking policy measures, the reserve bank did also intervene to maintain orderliness in the foreign exchange market by curbing excessive volatility and in the process stabilizing the market sentiments. during the current financial year 2012 – 13, after depreciating by more than 10 per cent till june 2012, the indian rupee started recovering gradually in response to major central banks ’ decision to go for further policy easing and the announcements of next round of reform measures by the government. the appreciation is, however, also associated with some degree of volatility. bis central bankers ’ speeches at the same time, it can be said that the indian rupee is not the only currency that has been experiencing increased volatility. there are other bric currencies, emerging market currencies and even euro that have seen such sharp movements. in fact,