underscore the point that no single statistical measure of equilibrium exchange rate can be an acceptable reference point for all purposes. the estimation of reer is sensitive to the methodology. the challenge for statisticians would to design one or more constructs which provide the “ best ” possible measures of equilibrium exchange rates. financial stability and stress indicators 47. let me finally turn to financial stability and stress indicators. the challenge of preserving and bolstering financial stability has come centre stage post crisis. we now know that price stability and macroeconomic stability do not necessarily guarantee financial stability and that financial stability needs to be pursued as a policy objective in its own right. this post crisis thinking has presented statisticians with a new set of challenges – that of developing additional matrices to monitor financial stability. indeed, the crisis has highlighted the importance of developing relevant statistics that are timely, internally consistent, and comparable across countries. 48. by far the biggest challenge both for policy makers and statisticians is that there is as yet no universally acceptable definition of financial stability. financial stability is also multidimensional, encompassing as it does, economies, markets, the financial sector institutions and financial market infrastructure, and hence is more difficult to measure. 49. several techniques are employed to assess financial stability and a host of quantitative measures are in the process of being developed for assessing systemic risks and for potentially predicting systemic events. the development of these models / techniques is in a nascent stage and each of them has its merits and demerits. some of the commonly used quantitative methods for financial stability assessment include early warning systems, macro - stress testing, and financial stability indices. 50. early warning systems are constructed from potential leading indicators to predict the probability of a financial crisis. macro stress testing models / techniques attempt to estimate the resilience of the financial system to adverse macroeconomic scenarios. aggregate financial stability indices represent another class of quantitative methods which aim at measuring the stability of a financial system at any given point in time. absence of specific benchmarks however, limits the use of such indices for predicting stress conditions / crisis more effectively. 51. as i mentioned earlier, financial stability is multi - dimensional and it can be impacted through different channels. signs of instability or vulnerability could thus manifest in different variables or indicators. there are thus challenges in first identifying a set of indicators which need to be monitored for financial stability and then identifying the level at which each indicator reflects stress conditions. the task becomes challenging given the interdependence

rupee? this is a wide and involved topic. so, i will restrict myself to a few major issues. 34. in a market determined exchange rate regime, any level of exchange rate at any point of time is an equilibrium value, reflecting the interactions of demand and supply. a market equilibrium exchange rate, however, is different from a fundamental equilibrium exchange rate ( feer ), as the latter can tell how misaligned the market exchange rate may be at any point of time. 35. john williamson, who pioneered the concept of feer, emphasised that the equilibrium rate is the rate which is consistent with internal balance – meaning full employment or full potential growth with low and stable inflation – and external balance – meaning a sustainable external balance position. the feer approach, however, ignores cyclical and speculative factors in determining the exchange rate path in the short - run. therefore some analysts view feer only as a medium - term concept. this being a normative approach, some also see it as the desired equilibrium exchange rate ( deer ) – internal and external balance being the obvious desires or objectives of policy. 36. there is another approach to estimating equilibrium exchange rate – known as the behavioural equilibrium exchange rate ( beer ), which tries to explain the behaviour of the exchange rate by accounting for sources of cyclical and temporary movements, while focusing on current fundamentals, unlike the sustainable external balance and internal balance focus of the feer. 37. given these conceptual building blocks of an equilibrium exchange rate, the imf ’ s consultative group on exchange rates ( cger ) uses three alternative methodologies to estimate fair values of exchange rates : ( i ) the macroeconomic balance ( mb ) approach, ( ii ) the equilibrium real exchange rate ( erer ) approach, and ( iii ) the external sustainability ( es ) approach. 38. the macroeconomic balance ( mb ) approach first estimates the difference between the projected current account balance ( cad ) position over the medium term at prevailing exchange rates, and the cad norm which is believed to be sustainable. then, the exchange rate adjustment that could eliminate this difference over the medium - term is estimated. the reduced - form equilibrium real exchange rate ( erer ) approach estimates directly an equilibrium real exchange rate for each country as a function of medium - term fundamentals such as the net foreign asset ( nfa ) position of the country, relative productivity differential bis central bankers ’ speeches between the tradable and non - tradable sectors,