, thus strengthening existing trends towards securitisation, as well as consolidation and / or disintermediation in this sector. securitised financial instruments are easier to trade internationally. furthermore, the unprecedented size of mergers and acquisitions within the euro area is encouraging the development of a large domestic market for corporate bonds. even a high - risk market segment comparable to the us “ junk ” bond market is likely to emerge within the euro area over time. it should be acknowledged, however, that a number of obstacles to the full integration of euro area financial markets still remain. separate national fiscal policies lead to discrepancies in credit and liquidity risk premia across the area. equity markets and securities settlement systems are still segmented. differences in financial market conventions persist. hence, the short - term liquidity and efficiency gains are smaller than a simple aggregation of national markets would suggest. most of the potential gains will only materialise fully over time. 3. the impact on cooperation at the global level the introduction of the euro also has implications for the international cooperation process. by reducing the number of key global players, the emergence of the euro area in principle simplifies international cooperation, as it facilitates the exchange of views and the formulation of common understandings on economic and financial issues. a more balanced relationship between the three major players - the united states, the euro area and japan - is helping to encourage each of these to take responsibility for contributing to a stable global environment. the european single currency may also foster the emergence of a tripolar monetary framework based on the us dollar, the euro and the japanese yen. policy coordination at the global level, however, is likely to continue to be of a non - binding nature in the future. following the collapse of the bretton woods system, larger countries have always refrained from committing themselves to formal exchange rate arrangements or other pre - defined rules. in this respect, the introduction of the euro has not changed the current picture. this does not mean that exchange rate stability is not desirable worldwide. in my view it is, not least because abrupt changes in exchange rates may generate calls for protectionism and for restrictions on capital flows, which eventually erode free trade and capital mobility. stable exchange rates, however, cannot be achieved by setting ranges of fluctuation for the major currencies ( target zones ). the key to sound international monetary relationships has to be found, instead, in sound domestic policies and institutions. efficient and effective international cooperation

review of october, 2006 explained the concept of overheating i. e., a situation in which current output is running above potential output. in the current environment, and in the presence of structural change, the task of identifying overheating becomes difficult for the monetary authority. for the conduct of monetary policy, however, it is crucial to monitor all available information for signs of overheating with a view to keeping inflation expectations stable and ensuring that the gains from high growth are consolidated. accordingly, sensing how close is the economy to its potential growth is the vital judgment that has to be made to set the timing and direction of monetary policy. what is potential growth is thus the question that holds the key. there is general agreement among policy makers that the level and pace of potential growth is becoming increasingly difficult to diagnose. open trade has expanded the supply potential of several economies. moreover, for a country undergoing structural transformation with large unemployment / under employment of resources, the concept of potential growth becomes even more fuzzy. for instance, the economist ( february 3, 2007 ) observes : " india is undergoing a paradigm shift and so backward - looking historical data are now irrelevant for assessing future growth ". nevertheless, monetary policy decisions have to be made and the closest approximation of potential growth must be identified in terms of a rate of growth which is associated with non - accelerating inflation. at the current juncture, the challenge facing us is to judge the compatibility of the current pace of growth with non - accelerating inflation. in this context, i would like to draw your attention to the new estimates of gross domestic saving and capital formation in india in 2005 - 06, released on january 31, 2007, the same day as the third quarter review. close analysis of these numbers reveals the underpinnings of the recent growth experience. the rate of gross domestic saving ( gds ), which was earlier estimated at 29. 1 per cent of gdp in 2004 - 05, has been revised upwards by a clear 2 per cent of gdp. the rate of gross domestic investment ( gdi ) for that year has also been raised by 1. 4 per cent of gdp to 31. 5 per cent. the significant improvement in gds in 2004 - 05 is attributable mainly to a distinct increase in saving by the corporate sector. the revision is consistent with the observed improvement in corporate profitability and internally generated resources that has been sustained over the period 2003 - 07, and to which we have been drawing attention for