solutions and outsourcing arrangements. such financial innovations have the potential of reducing costs and thereby contributing to increasing the overall efficiency of the economy and the financial stability. they may also, through faster information dissemination and more efficient functioning of the financial markets, contribute to improving the efficiency of transmission of monetary policy. of course, financial innovations and outsourcing arrangements come with their own set of risks which could pose challenges for the overall policy framework for the pursuit of financial stability. but i will discuss this a little later. finally, financial inclusion, through careful policy orientation, may help facilitate reduction in income inequalities and, by bridging the gap between the prosperous and the poor, can foster social and political stability. financial inclusion and financial stability : working at cross purposes this is not to say that there are no risks to financial stability emanating from greater financial inclusion. one only has to recall the savings and loan crisis in the us in 1980s to appreciate that even financial institutions geared to cater to the retail investors and, thereby, to foster financial inclusion, could be a source of financial instability. the recent crisis in us subprime markets is another case in point. policy makers have often endorsed marketing to subprime borrowers as a means of financial inclusion7. with hindsight, it seems clear that such over - extension of credit has the potential to affect the quality of the credit portfolio of banks and financial institutions and could have sown the seeds of financial fragility, and ultimately of financial instability. the position may be further aggravated by regulatory or governmental forbearance which has the potential to vitiate the credit culture amongst the target group. as elucidated by prof. raghuram rajan8, “ easy credit ” as a response to bridge the gap between the haves and the have - nevers could prove to be a “ financial access and financial stability ” – paper written by p. hawkins, feasibility limited south africa for bis ( 2010 ). collard, s. and kempson, e. ( 2005 ), affordable credit : the way forward, york : joseph rowntree foundation. rajan g., raghuram ( 2010 ), fault lines : how hidden fractures still threaten the world economy. bis central bankers ’ speeches costly way of redistribution and create a fault line along the financial sector where enormous stresses could build up and lead to an instability in the system akin to the subprime crisis of recent times. our own experience

domestic participants to manage exchange rate movements and reflected the desire to accommodate greater flexibility in the exchange rate in the future. the pboc has entered into a series of bilateral currency swap agreements whereby the pboc and other central banks ( over 20 in number ) have agreed to exchange the rmb with the respective counterparty currencies. 15. the size of the indian economy of around us $ 1. 8 trillion is one of the largest in the region and despite some moderation in the growth in the past couple of years, it is still one of the fastest growing countries in the world. the value of the indian rupee is marketdetermined without being pegged to any currency. india ’ s foreign exchange reserves are amongst the largest in the region. all these factors make the indian rupee a natural candidate for being considered for greater internationalization, especially greater use of rupee for trade invoicing. comparisons are bound to be made between renminbi and indian rupee on the issue of internationalisation. 16. indian rupee is not fully convertible at this stage. while the current account has been made fully convertible, we have consciously followed a calibrated approach towards capital account convertibility. despite showing increasing trends during last few years, india still accounts for a very small proportion of the global foreign exchange market turnover. though rupee invoicing is permitted under extant fema regulations, almost the entire bulk of international trade in india continues to be denominated in the us dollars ( the share of dollar bis central bankers ’ speeches invoicing in exports and imports during quarter ended december 2012 stood at 90 per cent and 83. 6 per cent, respectively ). we also need to recognise other structural bottlenecks that come in the way of transforming mumbai as an international financial centre similar to hong kong. 17. it is also important to understand that unlike china, which runs large current account surpluses, india has generally been a current account deficit country. in view of the large current account deficit, the exchange rate of the rupee is susceptible to the debilitating influence of large capital movements, especially during crisis periods. our accumulated reserves are in a sense “ borrowed ” reserves and not “ earned ” reserves in true sense. the sense of self insurance by having enough reserves can often prove to be misplaced, especially, during times of sudden reversal of capital flows. this does not mean that we should not aspire to see the rupee as an international currency.