the other three legs of the chair and to use monetary policy appropriately. central bankers must guard against turning monetary policy itself into a source of instability. so here too, the bottom line is to never lose sight of our longer - term objective of low and stable inflation. the prevailing worldwide economic weakness, together with geopolitical uncertainty and financial market volatility, has led to significant monetary easing in most countries. this easing has been broadly appropriate and, in some cases, indeed even more may be needed. but it is extremely important that the monetary authorities keep their eyes firmly on the economic horizon. by concentrating on developments 18 to 24 months ahead, not only will they ensure that the critical medium - term objectives are met, but the short - term needs of the economy are also addressed. monetary policy - makers should also be wary of taking on too many additional responsibilities, such as trying to stabilize selective market assets. this is not to say that we should not pay attention to what is happening in financial markets. we certainly should. these markets can convey important information about future developments. and they exert direct and indirect influences on the real economy. but monetary authorities must resist the siren calls for active management of financial markets and the pleas for regular intervention to help stabilize asset prices. it would be unfortunate if we were to repeat costly past mistakes for the sake of near - term expediency. canada, like most other countries, has committed itself to the four principles of sound economic performance : low and stable inflation, fiscal prudence, structural reform, and trade liberalization. as a country, we have made great progress on all four fronts in recent years. of course, pressures have emerged which threaten to undermine those commitments. these pressures have been resisted vigorously. while particular interest groups are unhappy with this resistance, the canadian public as a whole supports sound policies. canadians remain convinced that the authorities will follow these policies ; and that is why both household consumption and investment by smes continue to be strong. even in the face of geopolitical and international economic uncertainties, sound medium - term policies are helping to maintain strong domestic demand. to conclude, the current uncertainties will dissipate, and stronger growth will resume, provided we continue to pursue sound macro, trade, and structural policies. what is important is to anticipate the institutions, structures, and policies that we want to have in place once this latest turbulence subsides, and not to focus too narrowly on the present. although the

capital flows needs to be kept in mind. it is true that reserves are not required to meet the transaction motive which is to be taken care of by changes that will naturally occur in the market determined exchange rates. but, in a period of transition, when structural shifts can release strong excess demand or throw up temporary bottlenecks, reserves smoothen the process of change and mitigate pains of adjustment. so, some addition to reserves, in my view, would give additional comfort. forex markets 10. developing exchange markets is another important consideration in exchange rate management. recently, several measures were initiated to further integrate the indian forex market with the global financial system. banks were permitted to fix their own position limits and aggregate gap limits ( agls ) in january 1996. banks were permitted in october 1996 to provide foreign currency denominated loans to their customers out of the pool of fcnr - b deposits. in order to achieve greater integration between domestic and overseas money markets, authorised dealers ( ads ) were permitted in april 1997 to borrow from their overseas offices / correspondents as well as to invest funds in overseas money market instruments up to us $ 10 million. with a view to imparting flexibility to corporates and improving liquidity in the forward markets for periods beyond six months, ads were also permitted to book forward cover for exporters and importers on the basis of a declaration of exposure supported by past performance and business projection, provided the total forward contracts outstanding at any point of time did not exceed the average export / import turnover of the last two years. ads were also allowed to arrange forex - rupee swaps between corporates and run a swap - book within their open positions / gap limits without prior approval of the reserve bank. now, as per the decision taken last week, fiis are allowed to cover as a first step their debt exposures in the forward market. in order to further facilitate integration between domestic and overseas markets, banks with adequate capital strength may be encouraged to have higher limits for investments in overseas markets. this will help in developing further the forward markets. east asian experience : relevance to india 11. speaking of correction in external value and of volatility in forex markets, the question that is often asked is “ would india go the east asian way? ” in the early stages of development, east asian countries adopted a conscious policy of export - led growth stimulated by real depreciation of their currencies. it was only much later, when capital