2002 ) for electronic reporting of trades and online dissemination system and submission of bids for primary issuance of government securities and a clearing corporation of india ltd. ( ccil ), promoted by banks, financial institutions and primary dealers for clearing and settlement of trades in foreign exchange, government securities and other debt instruments, commenced operations in april 2001. the ccil acts as a central counterparty ( ccp ) to all transactions and guarantees settlement of trades executed through its rules and regulations eliminating counterparty risks in adherence to international best practices. oversight over the payments and settlement system is vested in a national payments council, and board for payment and settlement systems established within the rbi. as may be seen from this brief description of the various measures that had to be taken to develop the market and institutional framework for efficient monetary policy transmission, development of markets is an arduous and time consuming activity that requires conscious policy making and implementation. markets do not develop and function overnight : they have to be created, nurtured and monitored on a continuous basis before they start functioning autonomously. iii. exchange rate management the regime shift in the conduct of exchange rate management in india that occurred in the early 1990s had a significant impact on the monetary policy framework. coincidentally, the 1990s were characterised by bouts of currency turmoil and contagious financial crises in many parts of the world, developing, transitional and developed alike. monetary policy became increasingly complex. for the majority of developing countries, including those in the asian region, which continue to depend on export performance, appropriate exchange rate determination is of great importance as volatility imposes significant real effects in terms of fluctuations in employment and output and the distribution of activity between tradeables and non - tradeables, fluctuations that are difficult to absorb in such economies. in the fiercely competitive trading environment where countries seek to expand market shares aggressively by fiercely compressing margins, volatility in the exchange rate can easily translate ex ante profits into ex post losses along with the deleterious collateral impact on employment and economic welfare. the determinants of exchange rate behaviour however, seem to have altered dramatically. earlier, factors related to changes in merchandise trade flows and the behaviour of commodity price inflation were well understood and provided guidance for operating monetary policy. in this environment, monetary policy principally targeting low inflation was consistent with exchange rate changes under purchasing power parity. these traditional anchors of understanding have been swept away by the vicissitudes of capital movements, with currencies often moving far out

exchange rate depreciated, reflecting the fact that in a subdued global economy, exports are more sensitive to income ( i. e. global demand ) than to price. 46. reflecting the current and capital accounts in the bop, the exchange rate depreciated both in nominal and real terms ( table - 3 ) three concerns about cad 47. there are mainly three concerns about the cad in the balance of payments : ( i ) the quantum of cad ; ( ii ) the quality of cad ; and ( iii ) the financing of cad. let me briefly address each of these. bis central bankers ’ speeches quantum of cad 48. reserve bank ’ s estimates show that the sustainable cad for india is 2. 5 per cent of gdp. a cad above the sustainable level, year after year, is a clear macroeconomic risk as it raises concerns about our ability to meet our external payment obligations and erodes the confidence of potential lenders and investors. 49. an additional concern is that we are having a large cad even in the face of slowing growth. this is perplexing because economic logic suggests that the cad should improve in a slowing economy due to a decline in import demand. cross country evidence in fact supports this hypothesis. such an adjustment has not manifested in india though because : ( i ) oil and gold imports are relatively inelastic to income changes ; ( ii ) on non - oil imports, domestic supply is still unable to compete with imports, and ( iii ) supply constraints and subdued external demand are impeding exports. quality of cad 50. the concern about the quality of cad arises from the composition of imports. if we were importing capital goods, we can maybe countenance a higher cad because investment in capital goods implies building production capacity for tomorrow. on the other hand, import of gold, largely as a hedge against inflation, is a deadweight burden, especially at a time when the cad is beyond the sustainable level. financing of cad 51. even as the cad has been high, we have been able to finance it because of a combination of “ push ” and “ pull ” factors. on the push side is the amount of surplus liquidity in the global system consequent upon the extraordinary monetary stimulus provided by advanced economy central banks. on the pull side are the measures taken by us to attract capital flows such as liberalizing fdi, expanding the limits for foreign investment in corporate and government debt and easing restrictions on external commercial borrowing by corporates. 52.