of cancellation and re - booking of their forward contracts and booking of forward contracts under past performance criterion were also not being used in the right spirit. as you would appreciate such speculative forces tend to be self - reinforcing and often result in a situation where exporters keep on deferring their receipts and importers rush in to buy forwards, thus aggravating the situation in hand. the administrative measures undertaken by reserve bank in the month of december 2011 were aimed at curbing these speculative behaviour of such entities. the measures did achieve the intended policy objectives and also led to an immediate fall in the volumes of the markets. the actual hedging requirements of the real sector, however, were not left unattended as we subsequently relaxed some of the measures to accommodate customer needs. within the overarching prerequisite of facilitating genuine hedging needs of the customers, reserve bank would consider relaxations, in particular those relating to intra - day position limits, in a calibrated manner at appropriate time. let me assure you that reserve bank will continue with its calibrated and gradual approach towards liberalisation of the foreign exchange market in india but at the same time we will expect greater degree of responsibility and accountability from all the participants. in the bis central bankers ’ speeches context of our measured approach to market liberalisation, there has been a lot of debate on scope of wider usage of indian rupee both in the region / abroad, or in other words, internationalization of indian rupee. i will now briefly touch upon the issue in the third and last part of my address. challenges for internationalization of indian rupee in view of the recent crisis in the financial market which resulted in a slowdown in the world economy, some views have emerged from various quarters on whether the indian rupee could play a larger role as an international currency. this issue assumed a topical and, if i may add, patriotic significance when the symbol for indian rupee was unveiled amidst huge media publicity. proposals for use of local currencies of the emes under bilateral and multilateral arrangements including the initiatives taken by china for yuan and the recent suggestions emanating from brics nations have provided renewed focus to this. it is a known fact that wide acceptance by participants in trade and financial markets makes a currency a popular option for trade settlement and for maintenance of reserves. the characteristics which a currency needs to possess before it could become popular as a transactions currency would include free convertibility, ability to invest

in the union budget and other related documents transparently as distinct components under separate sub - heads. the introduction of mss has succeeded, in principle, in restoring laf to its intended function of daily liquidity management. since its introduction in april 2004, the mss has served as a very useful instrument for medium term monetary and liquidity management. it has been unwound in times of low capital flows and greater liquidity needs and built up when excess capital flows could lead to excess domestic liquidity. in principle, the mss is designed to sterilise excess capital flows that are deemed to be durable or semidurable. in practice this is difficult to discern ex - ante : hence the range of mss instruments in terms of their duration can effectively modulate the sterilisation on an ex - post basis. our strategy of introducing this new mss instrument to manage excess capital flows and reduce volatility in the exchange rate reflects the overall issue of global capital flows that many developing countries are facing, particularly in asia. net private flows ( equity + debt ) have increased from an average of about us $ 180 billion over the five year period 1998 to 2002, to about us $ 650 billion in 2006, amounting to about 5 per cent of their gdp ( world bank, 2007 ). absorption of such a volume of flows would imply a corresponding current account deficit of about 5 per cent of gdp. what should be the approach to exchange rate determination in such circumstances? to what extent is the current account balance a good guide to evaluation of the appropriate level of an exchange rate? to what extent should the capital account influence the exchange rate? what are the implications of large current account deficits for the real economy? are they sustainable and, if not, what are the implications for financial stability in developing countries? in india's case, as mentioned, we have almost always had a modest current account deficit though, because of remittances and service exports, the trade deficit has widened significantly in recent years. these are the issues that we have to deal with as we negotiate fuller capital account convertibility, but i believe these are wider questions that are engaging most countries in asia. going forward, there will be a continuous need to adapt the strategy of liquidity management as well as exchange rate management for effective monetary management and short - term interest rate smoothening. the key questions we continue to face with are what should be the instruments and modes of management of liquidity in