increased linkages across financial institutions and made the assessment of their exposures more difficult. it has also become harder to update the valuation of collateral as market developments have unfolded. incomplete and differing disclosures also complicate attempts to draw comparisons between them. this insufficient transparency at the firm level probably undermined ex ante market discipline. these issues, which have been well - known to the regulators and the industry for some years, become pressing mainly in a crisis. lending institutions find it difficult, if not impossible, to simultaneously review in a thorough manner a large proportion of their exposures. how effectively ex post market discipline is allowed to operate will have a significant impact on the future conduct of financial firms. to conclude, the derivatives market in india has been expanding rapidly and will continue to grow. while much of the activity is concentrated in foreign and a few private sector banks, increasingly public sector banks are also participating in this market as market makers and not just users. their participation is dependent on development of skills, adapting technology and developing sound risk management practices. corporates are also active in these markets. while derivatives are very useful for hedging and risk transfer, and hence improve market efficiency, it is necessary to keep in view the risks of excessive leverage, lack of transparency particularly in complex products, difficulties in valuation, tail risk exposures, counterparty exposure and hidden systemic risk. clearly there is need for greater transparency to capture the market, credit as well as liquidity risks in off - balance sheet positions and providing capital therefore. from the corporate point of view, understanding the product and inherent risks over the life of the product is extremely important. further development of the market will also hinge on adoption of international accounting standards and disclosure practices by all market participants, including corporates.

on global welfare, it would definitely be rated green. conventional monetary policy would typically fall in this category, as it would raise output in the home economy, and create demand for exports from the foreign economy. a green rating for such policies would, however, assume that the stage of the financial and credit cycle in the home and foreign economies is such that financial stability risks from low interest rates are likely to be limited. a policy could also be rated green if it acts as a booster shot and can jump - start a large home economy, but creates temporary negative spillovers for the foreign economy. even if there are temporary adverse spillovers on foreign countries, the policy, through its effect on home economy growth and demand for foreign goods, can eventually provide offsetting large positive spillovers to the rest of the world. of course, it is important that the home economy, after receiving the booster shot and picking up growth, not follow policies ( such as holding down its exchange rate ) that minimize positive spillovers to other countries. a policy rated red on a static basis could thus be deemed green based on implicit commitments over time. it is possible to visualize other policies that have large positive effects for the originating country ( because of the value of the policy or because of the country ’ s relative size ) and sustained small negative effects for the rest of the world. global welfare, crudely speaking, may go up with the policy, even though welfare outside the originating country goes down. while it is hard to rate such policies without going into specifics, these may correctly belong in the orange category – permissible for some time but not on a sustained basis. even conventional monetary policies to raise growth in the home economy could fall in the orange category if countries are at a stage of financial cycle where low interest rates lead to significant financial stability risks in the home and foreign economies. clearly, foreign countries may have policy room to respond, and that should be taken into account. perhaps the right way to measure spillovers to the foreign country is to measure their welfare without the policy under question ` and their welfare after the policy is implemented and response initiated. so, for instance, a home country a at the zero lower bound may initiate quantitative easing ( qe ), and a foreign country b may respond by cutting interest rates to avoid capital inflows and exchange rate appreciation. the spillover effects of qe would be based on b ’ s welfare if qe was not undertaken versus b ’ s welfare after q