rate currency and leave the liability un - hedged. the currency crisis in latin america as well as in the far east had, in addition to other problems, implosive and indiscriminate foreign currency borrowing at the heart. in the interest of financial stability, it is necessary to monitor and regulate the foreign currency loan liability. the regulatory regime so far has had the following broad components : i. restriction on short term ( less than three years ) borrowing ii. a loosely monitored overall aggregate limit on foreign currency liability, iii. a discriminatory regime channelling flow into the priority sectors and disallowing flow into sensitive sectors such as real estate and iv. a cap on the overall cost of borrowing, as a tool to address the adverse selection problem, h. it is true that the ecb regime has evolved in response to the investment needs of the economy as well as that of specific priority sectors and in the process has perhaps become more discretionary than necessary. there is a need to consolidate the regime. the guiding principle ought to be that no socially useful venture goes bis central bankers ’ speeches unfinanced and at the same time ensuring that burgeoning foreign currency debt does not pose stability problems. this is easier said than done. i. globally, presumably because of the prolonged soft interest rate conditions in the west, there has been a significant increase in the debt component of the capital structure of the corporate balance sheet. the foreign exchange risk inherent in cross border borrowing raises stability concerns. in india, we have for some time been concerned about the unhedged exposures relating to the external commercial borrowing. there are several disincentives for hedging ; cost of hedging, comfort drawn from accounting accommodation, etc. active volatility management by the reserve bank also may contribute to the process. an orthodox solution is to mandate compulsory hedging by all foreign currency borrowers. there are several practical difficulties, though. first, a central authority mandating how an entrepreneur should manage the risk smacks of a regression to the command and control economy. second, do we have a market that can support hedging by all foreign currency borrowers? third, hedging is essentially transfer or parcelling of risk. where are we transferring the risk in this case? to the banks ’ books? faulty mechanism design can create perverse incentives and lead to inefficient outcomes. a saner approach would perhaps be to create an atmosphere and

no escape from it. it is a moot question as to how fast the movement should be. that will depend on how fast we can meet the most important preconditions like fiscal consolidation, inflation control, low level of npas, low and sustainable current account deficit, strengthening of financial markets, prudential supervision of financial institutions, etc. india has already made visible progress on these fronts. there are of course risks, but we need to accept these risks and move forward boldly while controlling the risks as far as practicable. if the experience of developed countries is any pointer, sound policies, robust regulatory framework promoting a strong and efficient financial sector, and effective systems and procedures for controlling capital flows greatly enhance the chances of ensuring that such flows foster sustainable growth and do not lead to disruption and crisis. india has all these in place and we need to keep on strengthening them. as i step aside, i wish all the actors in this story the best of luck. 19. thank you for your attention. bis central bankers ’ speeches