quality of services is too attractive to ignore. 5. it is also felt that a larger bank may be less risky than a smaller bank as the larger bank will have a more diversified portfolio resulting in less volatility in its earnings. consequently, a large bank may command higher credit rating than a smaller bank. in a march 2016 report, fitch rating agency mentioned following : “ more stable banking systems tend to be structured around a number of large'pillar'banking groups. these large banks in a consolidated banking system enjoy scale benefits leading to better diversification of risks and stronger overall profitability contributing to higher credit ratings. ” 6. large banks do benefit from economies of scale in terms of risk diversification, although this benefit disappears when banks become excessively large beyond a certain threshold size. this threshold size has been subject of much debate in the discipline of finance. however, there is no clear research which may point towards an optimum size for a bank in a particular country. perhaps in future, research will throw light on the optimum size of banks. however, in the context of india, it is felt that there is ample room for consolidation in the bis central bankers ’ speeches banking sector, especially among psbs without creating issues of moral hazard or too big to fail concerns. it does appear that the banking system in india is too fragmented at present. there is evidence, as measured by herfindahl - hirschmann index ( hhi ) for indian banking sector using square of on - balance sheet market share of all banks in the system which works out to be 518. 53. this indicates that our banking system is highly fragmented and diffused. in fact there is evidence which shows that this index has been falling over the years in india. 7. there are 48 domestic banks ( excluding rrbs and labs ) out of which there are 27 psbs having a market share of around 70 % in terms of asset size. a comparison of performance of larger psbs with smaller psbs does indicate that larger psbs perform better. for example, among all psbs, larger psbs like sbi and bank of baroda are trading at higher price to book value ratio in comparison to other smaller psbs. sbi has been able to maintain relatively strong capital ratios and appears to be in a better position to withstand shocks to asset - quality. this indicates that under indian conditions, there is lot of scope for banks to grow in size to become efficient and diversify their risks. 8.

market - based measures of inflation expectations are consistent with inflation meeting our 2 % target at the end of 2024, and being slightly below 2 % from 2025 onwards. robustness turning to the second principle, we need to choose the mix of instruments that is most robust to the wide range of plausible scenarios we are facing. this calls for us to avoid normalising our monetary policy using all instruments at once, in order to minimise uncertainty and reduce the risk of financial stability being negatively affected. the natural way forward would be to start raising interest rates while keeping the stock of assets purchased under the app and pepp constant. this seems the most appropriate approach for a number of reasons. first, the size of our balance sheet is already expected to significantly shrink and its composition will change as the tltros are wound down, ultimately leading to a reduction of around €2. 2 trillion in excess liquidity. second, we do not need to risk unsettling financial markets via a passive runoff or active sales of bonds we hold on our balance sheet, given that we could proceed with the necessary withdrawal of accommodation in other ways. starting to reduce the stock of assets purchased under the app and pepp would likely exacerbate the impact of rate changes, both along the yield curve and on risk premia, especially if liquidity is declining. third, although we have plenty of experience of how asset purchases and policy rates can reinforce each other as part of an easing strategy, we have no experience of the reverse scenario in the euro area. and the experience of other major central banks, limited as it is, is unlikely to be transferable to the euro area given the unique nature of our economic, financial and institutional set - up. in this context, we will be much more able to anticipate the consequences of gradually adjusting rates while keeping our balance sheet constant. using policy rates to withdraw accommodation thus allows us to better calibrate the adjustment that is consistent with 2 % inflation over the medium term. this reduces the risk of an overcorrection that would durably depress the economy. and, at the same time, it allows us to move faster if the risk of second - round effects starts to materialise. tightening policy through rate changes would also be simpler for us to communicate and easier for the general public to understand, reinforcing confidence and the anchoring of inflation expectations at our target. so, once net asset purchases have come to an end and the stock