the boundary itself varies for different regulatory clusters – the focus of a banking regulator would be entirely different from that of a securities regulator, from that of an insurance regulator etc. and all of which may be different from the focus required for regulation of markets. if the entire financial system is looked as a single ecosystem, then inspite of the inherent differences between the various market players, it should be possible to identify the macro drivers of the whole system, the network flows. using this perspective, it becomes evident that just focusing only on the perimeter would be missing an integral component that may need regulatory attention. current crisis – perimeter issues as mentioned earlier, the origins of the current crisis lay within the heavily regulated institutions. the impact of the crisis, however, was exacerbated by dynamic interconnectedness between entities across regulated, unregulated and lightly regulated sectors. as some of the recent reports have pointed out, the two concerns relating to “ outside perimeter ” entities that contributed to the current crisis were : ( i ) maturity transformation being undertaken by these entities, which traditionally used to be a function of banks ; and ( ii ) the systemic leverage resulting out of the hugely leveraged positions of these entities, either through direct borrowing from banks or through the funding markets. the central issue in both the above is the interaction between the unregulated entities and the formal regulated funding channels, essentially banks and money markets. the maturity transformation primarily entailed heavy reliance by these entities on short term funds for funding long term assets. the prudential framework for banks placed a significant reliance on management of these alm mismatches but the unregulated entities, such as sivs didn ’ t have any oversight and as a business model, ran huge alm mismatches. the model just broke down when the funding markets started seizing. many of the entities, like hedge funds, were consciously left unregulated because of the fact that they managed only private capital pools where the issue of investor protection was not relevant. however, what was not appreciated was the systemic risks these entities were posing on account of the huge leverage positions these were carrying through either the formal banking channel or the funding markets, particularly repo markets. the seamless efficiency thought to be provided by close integration of the underlying asset markets and repo markets proved to be just a chimera. the disaggregated exposures of the regulated clusters at any point of time to the unregulated entities

of cancellation and re - booking of their forward contracts and booking of forward contracts under past performance criterion were also not being used in the right spirit. as you would appreciate such speculative forces tend to be self - reinforcing and often result in a situation where exporters keep on deferring their receipts and importers rush in to buy forwards, thus aggravating the situation in hand. the administrative measures undertaken by reserve bank in the month of december 2011 were aimed at curbing these speculative behaviour of such entities. the measures did achieve the intended policy objectives and also led to an immediate fall in the volumes of the markets. the actual hedging requirements of the real sector, however, were not left unattended as we subsequently relaxed some of the measures to accommodate customer needs. within the overarching prerequisite of facilitating genuine hedging needs of the customers, reserve bank would consider relaxations, in particular those relating to intra - day position limits, in a calibrated manner at appropriate time. let me assure you that reserve bank will continue with its calibrated and gradual approach towards liberalisation of the foreign exchange market in india but at the same time we will expect greater degree of responsibility and accountability from all the participants. in the bis central bankers ’ speeches context of our measured approach to market liberalisation, there has been a lot of debate on scope of wider usage of indian rupee both in the region / abroad, or in other words, internationalization of indian rupee. i will now briefly touch upon the issue in the third and last part of my address. challenges for internationalization of indian rupee in view of the recent crisis in the financial market which resulted in a slowdown in the world economy, some views have emerged from various quarters on whether the indian rupee could play a larger role as an international currency. this issue assumed a topical and, if i may add, patriotic significance when the symbol for indian rupee was unveiled amidst huge media publicity. proposals for use of local currencies of the emes under bilateral and multilateral arrangements including the initiatives taken by china for yuan and the recent suggestions emanating from brics nations have provided renewed focus to this. it is a known fact that wide acceptance by participants in trade and financial markets makes a currency a popular option for trade settlement and for maintenance of reserves. the characteristics which a currency needs to possess before it could become popular as a transactions currency would include free convertibility, ability to invest