basis, they also need to assess counterparties on a collective basis. they need to understand how their own actions to protect positions can put pressure on key counterparties, especially when other market participants are likely to be taking similar action to protect themselves. so beyond ensuring that their own individual positions are sound and well protected, banks need to assess whether there is a systematic component to a market that could adversely affect multiple counterparties at the same time, and thereby affect their own risk exposures. as we have seen, a counterparty does not need to be technically insolvent for it to be shunned by other market participants. the anticipation of downgrades, triggers, and so forth could very quickly cause a firm to lose funding and fail. in short, banks and regulators need to understand the type of market conditions that will exist when there is likely to be reliance on collateral, guarantees, or other contract clauses. it is then important to assess the likelihood that the bank's safeguarding actions could worsen market conditions and actually increase its losses. might the bank only realize collateral at substantially reduced prices? would multiple counterparties suffer distress at the same time? would guarantors perform in times of distress? in other words, would the collateral, guarantee, insurance, hedge, and so forth work in precisely the time the institution would need it most, that is, during a market stress event? these are important questions that regulators and supervisors are asking in the basel committee and in the financial stability forum, and i represent the federal reserve system on both of these bodies. naturally, these types of questions underscore the importance of stress testing and scenario analysis that focus on market - wide events. such stress tests would include the potential for key counterparties to fail or suffer difficulty at the same time, for market liquidity to erode and remain low for some time, and for market participants to view the bank itself as an impaired counterparty. and these stress tests, when properly designed, can provide information that typical statistical models may leave out or have trouble capturing, such as abnormally large jumps or market moves, evaporation of liquidity, prolonged periods of market distress, or structural changes in markets. stress tests are most useful when they aim to include potential secondary or " knock - on " effects, which are also often difficult to model with standard techniques. in these ways, stress tests can serve as a complementary tool to other risk measures. even if the ex ante estimate of

order. the annual growth in real gdp since 2003 - 04 2 has averaged 8. 7 per cent. investments and savings as percentage of gdp have been in excess of 30 per cent since 2004 - 05 3 thus indicating a 0. 4 % in 2004 - 05 ; 1. 2 % in 2005 - 06 ; and 1. 1 % in 2006 - 07. 2003 - 04 to 2007 - 08. 2004 - 05 to 2006 - 07. potential for continued growth in output and productivity over the medium term. similarly, like most of the rest of the world, india has, by and large, experienced benign inflationary conditions averaging around 5. 2 per cent since 2004 - 05 4. however, at this juncture, both domestic output and prices are under some pressure due to recent global developments with regard to the prices of food, fuel and metals, and the turbulence in the financial markets. our main challenges are eradication of poverty, efficient use of water, reviving growth in agriculture, improving physical and social infrastructure, upgrading human skills and, above all, fiscal empowerment coupled with the increasing real sector flexibility. our strengths mainly are the demographic dividend, the stability of the political system, and the emergence of a very broad based and growing entrepreneurial class, which has a penchant for innovation. in overcoming the challenges and taking advantage of the strengths, our engagement with global economies, in particular with the united states, is bound to play a very critical role. we are optimistic about a continued mutually beneficial engagement with the global economy. indians are providing services in various parts of the world – u. s. a., middle east, u. k. and east asia. their services range from the less skilled, at one end of the spectrum, to the very highly skilled professionals at the other end. their annual contribution by way of remittances is about three per cent of gdp now. these are in addition to export of services, especially software which are of the same order. indians are among the most significant foreign students to attend the universities for higher education in usa, uk, australia, canada, singapore, china, etc. following sustained higher growth in india, a reverse process of brain flow has also commenced by way of foreign nationals and expatriate indians expressing their interest for pursuing more fruitful ventures in india. as a result, corresponding trade and private business linkages have also started growing. to illustrate, recently a globally active bank has launched a product in india –