the exchange rate will either remain stable or that the currency of the country with a high interest rate appreciates. one example of such speculation has been borrowing in japan, where the interest rate has been low for a long time, and investing in australia or new zealand, where the interest rate has been much higher. however, this has been proved to be a risky strategy. financial crises have on numerous occasions led to a severe decline consensus forecasts are the average of forecasts made by a number of different analysts and reported monthly by consensus economics. the forecasts shown are from the month of february in the respective years. the survey does not include forecasts for the tcw index. instead, the forecasts for the sek / eur rate and the implied forecasts ( cross rates ) for the krona against the usd, gdp jpy and nok have been used. these currencies correspond to approximately 95 per cent of the tcw index. the forecasts for the respective currencies entail a percentage change in relation to the current exchange rate at the time of the survey. these percentage changes have then been weighed together using tcw weights to a percentage change in the tcw index compared with the value of the index at the date of the survey. a classical study of this is meese and rogoff ( 1983 ). see also cheung, chinn and pasqual ( 2005 ). this is known as covered interest parity, and means that the forward rate in relation to the current exchange rate corresponds to the interest rate differential between the countries. the reasoning is as follows : if one exchanges kronor for dollars, invests in a us one - year bond and then in one year ’ s time exchanges them back to kronor according to the current forward rate, the investment contains no exchange rate risk. the yield is therefore the same as that given by investing in a swedish one - year bond. uncovered interest parity means that the interest rate differential corresponds to an equally large expected change in the exchange rate. in our example this means that one exchanges the money for kronor in one year ’ s time at the current exchange rate, which entails an exchange rate risk. see, for example, froot and thaler ( 1990 ). this phenomenon has been called the forward premium puzzle. in the carry trade, for instance, in connection with the asian crisis in 1997 – 98, when “ high interest rate currencies ” in asia weakened

( ltro ) and special open market operations ( operation twist ) were also conducted to support growth. most importantly, the liquidity was closely monitored and to avoid falling into a liquidity trap, all the rbi liquidity measures came with sunset clauses. 10. the dislocations in everyday activity and access to finance brought to the fore solvency concerns across individuals, small and large businesses, and raised fears of impending asset quality stress among banks and financial institutions. the rbi responded with a volley of regulatory measures that included a loan moratorium, resolution frameworks 1. 0 and 2. 0 to facilitate restructuring of viable but distressed loans, etc. rbi also deployed its macro - prudential toolkit using various counter - cyclical measures. like liquidity, even here the rbi followed a calibrated approach with sunset clauses. for instance, the covid resolution packages set out parameters to ensure that viable borrowers are benefited, and the dispensations are available only for a finite window. meanwhile, banks were advised to raise capital and restrictions were placed on dividend payments in early days itself so as to conserve the capital of banks and improve their risk absorbing capacity. 2 / 7 bis - central bankers'speeches 11. even before onset of the pandemic, rbi had used innovative ways in resolving distressed institutions without requiring infusion of tax - payer money, while safeguarding depositor interest. instead of applying traditional template of merger of a weak bank with a strong domestic bank or government bailing out a bank, innovative approaches were adopted. in the case of yes bank, a group of banks came together to infuse capital to revive the bank. in the case of punjab and maharashtra co - operative bank a market - based resolution through the expression of interest route was used. for, lakshmi vilas bank, a foreign bank, albeit through wholly owned subsidiary1 route, was allowed to acquire the operations. 12. issues relating to governance, assurance and supervision were at the root cause of many of the problems. however, i believe that all stakeholders of financial sector, including government, regulators and regulated entities have dealt with the challenges of last decade in a collaborative, calibrated and innovative manner. overall, the financial sector and reserve bank have learnt and grown from these experiences strengthening the institutional architecture, the regulatory framework as well as the financial system. 13. on the supervisory front several initiatives have been taken with the overarching vision of being able to provide a sound forward looking