this framework as a part of the overall risk perceptions of the bank and the capital planning strategy of the bank. issues in data infirmity still remain to some extent. in many cases, the alco ’ s role remains confined to deciding on interest rates of the bank. this is partly due to lack of decision support system available to the alco. availability of impact and scenario analysis of changes in yield structures would be a significant enabling factor. the reserve bank has recently issued draft guidelines to banks with the objective of graduating from the current maturity ladder approach prevalent in most banks to a duration gap approach. the later approach makes it possible for banks to calculate the modified duration of assets and liabilities, the duration gap and duration of equity. the concept of duration of equity gives banks, subject to certain limitations, a single number indicating the impact of a one per cent change of interest rate on its capital, captures the interest rate risk and thereby helps move a step forward towards assessment of risk based capital / economic capital. credit risk : another important issue is that bank resources and supervisory resources have concentrated on credit risk modeling of commercial and industrial portfolios, with relatively fewer resources devoted to risk quantification in the retail credit area 1. the possible reasons could be ( i ) from a systemic perspective, it makes economic sense to devote more resources to evaluating the risk factors of larger loans ( ii ) there is a long history of ratings agency evaluations for publicly traded firms which, along with the extensive data available for publicly traded firms, provided an extremely useful benchmark for the development of quantification methods for commercial portfolios. however, despite this commercial side emphasis, retail credit is a substantial part of the risk borne by the banking industry, and can not be ignored. recognizing this, over the last decade or so, the industry and academia have devoted significant resources to developing more sophisticated creditscoring models for measuring this risk. like their counterparts on the commercial side, these models also rely heavily on quantitative analysis. derivatives : there has been a spurt of derivatives exposures in the off balance sheet exposures. the composition of derivatives portfolio of the banking system has also undergone a significant transformation. forward foreign exchange contracts which accounted for around 80 % of total derivatives in march 2002 declined steadily and stood at almost 43 % in march 2006 while the share of interest rate contracts went up from 19 % to 54 % during the same period. foreign currency options have recorded noticeable increase during the last year. the share of single currency

stock of bonds that we have already bought. so even when we phase out our net purchases of bonds, the accommodation will still remain in place and be sufficient to ensure the necessary support to growth. the buoyant growth coupled with the monetary accommodation will take us back to an inflation rate which is in line with our goal. there ’ s little doubt about that. hence, it is time to take a decision now on scaling back our bond purchases at the beginning of next year. and this point leads to a second challenge. we need to think about how to bring our unconventional measures to an end. we need to look ahead and discuss what the exit might look like. i am aware that this requires us to communicate very carefully. on the one hand, we must help markets to get an idea of what the exit will look like. on the other hand, we mustn ’ t confuse them with vague or ambiguous ideas. 1 / 2 bis central bankers'speeches it ’ s a delicate balance we have to strike. and in my view, we need to find this balance now. thank you for your attention. 2 / 2 bis central bankers'speeches