rbi, the second agreement with the government was signed, where mr. montek singh ahluwalia represented the government. in pursuance of this second supplemental agreement between the rbi and the government of india on march 6, 1997, the ad hoc treasury bills were completely phased out from april 1997, replaced by a scheme of ways and means advances, subject to limits. in order to smoothen the transition, the government of india was allowed to incur also an overdraft, but at an interest rate higher than the rate applicable for ways and means advances ( wma ). with effect from april 1, 1999 these overdrafts were allowed only for a maximum of ten working days. these features placed the central government on par with the state governments which were brought under an “ overdraft regulation scheme ” since 1985. furthermore, it was agreed that the rbi would trigger fresh floatation of government securities whenever 75 per cent of the wma limit was reached. it was also agreed that the government ’ s surplus cash balances with the rbi, beyond an agreed level, would be invested by it in government securities. while the transition to a fullfledged wma and overdraft mechanism was gradual, non - disruptive and consensual, the successful implementation of this mechanism made it possible to incorporate some of these practices into a law – the fiscal responsibility and budget management act ( frbm act ). it is noteworthy that this law also practically prohibited rbi from participating in primary issues of all government securities. as a result of the concerted efforts to restore fiscal balance through tax reforms, expenditure management, institutional reforms and financial sector reforms in the first half of the 1990s, there was significant reduction in the magnitude of fiscal deficit and the proportion of debt relative to gdp during the period 1991 to 1997. however, during the period 1997 to 2003, there was a reversal in the trend of fiscal consolidation, and the cumulative impact of industrial slowdown, fifth pay commission award, and a lower than expected revenue buoyancy culminated in fiscal deterioration. this deterioration in the indian fiscal position happened at an inopportune time when there was fiscal improvement the world over and india was trying to globalize. it is important to remember that india ’ s fiscal situation has been significantly divergent from the global fiscal situation and continues to be so even now. i think, this is the background we have to keep in view whenever we discuss the pace and the content of economic reforms in india.

issue. further, the postcrisis recognition of systemic risk, based on inter - connectedness, makes the case for co - ordination on risk management, with clearly defined roles for different agencies. third, while addressing external stability in general terms seems to be becoming an acceptable component of a broadened central bank mandate, the nature of the response will depend significantly on both the state of the domestic economy and global conditions. also, short - term objectives may be in conflict with long - term ones, requiring some prioritization. let me conclude with a quote from a recent speech by ben bernanke : “ … the past two years have demonstrated the value of policy flexibility and openness to new approaches. during the crisis, central banks were creative and innovative, developing programmes that played a significant role in easing financial stress and supporting economic activity. as the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses ” ( bernanke, 2010 ). these innovative responses need to manifest on three fronts. one, broader mandates for central banks will need to be made explicit and conditional on the priority of the core mandates. this should eventually lead to definitions and quantification of conditions in which the broader mandates will kick in. two, appropriate instruments need to be dusted off or developed to ensure that broader mandates can be fulfilled. a single or a small number of traditional monetary instruments cannot be expected to do the job. finally, these broader mandates may be more effectively pursued in a collective institutional framework, which will inevitably raise co - ordination challenges, which need to be addressed. i would like to thank the organizers once again for inviting me and thank you all for listening to me. references bean, charles, matthias paustian, adrian penalver and tim taylor ( 2010 ), “ monetary policy after the fall ”, paper presented at federal reserve bank of kansas city annual conference, jackson hole, wyoming. bernanke, ben s. ( 2010 ), “ emerging from the crisis : where do we stand? ”, remarks at the 6th ecb central banking conference, frankfurt. ostry, jonathan d, atish ghosh, karl habermeier, marcos chamon, mahvash qureshi, and dennis reinhardt ( 2010 ), “ capital inflows : the role of controls ”, imf staff position note, february. poole, william ( 2010 ), “ monetary policy flexibility :