Dr. Jalan attributed several factors that influenced the forex market in the country between May-August 2000. According to him factors such as "expectations", "bandwagon effect" and "volatility in capital inflows", played a major role in exchange rate movements and it was not possible to come to a definitive conclusion about the relative role of each of these factors.

The governor observed that while it was difficult to estimate the precise cause and degree of volatility, a combination of measures had to be resorted to in order to minimise the adverse impact of this volatility on the rest of the economy. He also stated that reliance on one or two measures like sharp monetary tightening, unchecked depreciation of the exchange rate, and/or unlimited use of reserves could have had unacceptable longer term consequences for the economy. all of which could have lead to a greater risk of irreversible destabilisation.

The governor called for exercising extreme care and caution in the management of exchange rates and forex reserves in light of the uncertainty in the direction of capital flows in a floating rate environment.

The continued good performance of exports, particularly software exports, coupled with a comfortable level of foreign exchange reserves and a favourable outlook for foreign direct investment in certain important sectors like information technology and telecommunications, has helped cushion the adverse impact of the spiraling rise in crude oil prices. Despite substantial increase in the oil import bill, increase in exports and invisible receipts was expected to keep the current account deficit for the year 2000-2001 at less than 2 percent of GDP.

The monetary policy for the second half of 2000-2001

With liquidity conditions likely to remain adequate during the rest of the year, the banking system is not expected to face any difficulty in meeting the demand for credit. The RBI reiterated its commitment to providing liquidity, where necessary, through its Liquidity Adjustment Facility (LAF). The LAF, introduced since June 2000 was being used to influence short term interest rates by modulating day- to-day liquidity conditions and to contain volatility in the forex market. The LAF would continue to be operated in a flexible manner, both in terms of rates and tenors in keeping with the developments in the financial markets.

The governor emphasised the need for market participants to take greater recourse to appropriate asset -liability and risk management techniques in order to take account of unanticipate changes in monetary conditions and interest rate outlook.

Development of Money Market

The RBI has decided to extend the specific permission granted to select corporates to route call money transactions through primary dealers, currently available up to December, 2000, for a further period of six months.

As regards other financial institutions and mutual funds, which are currently permitted to lend directly in the call/notice money market, the central bank plans to constitute a group to suggest a smooth phasing out such direct intervention, by a planned reduction in their access to call/notice money market.

In July 2000, new guidelines on the issue of commercial paper (CP) were issued and these are expected to provide considerable flexibility to the CP market while ensuring prudential safeguards and transparency. The guideline will also enable companies in the services sector to meet more easily their short-term working capital needs.

The restriction on transferability period for CDs issued by banks and financial institutions have been withdrawn.

Rating has been mandatory for the term deposits accepted by all-India financial institutions with effect from November 1, 2000.

Prudential Measures

The central bank has ensured that all commercial banks adhere to the directives issued in October 1998, under which they are required to make a general provision on standard assets of a minimum of 25 basis points. This directive came into force from the year ended March 31,2000. The provision so made is proposed to be included in the Tier 2 capital.

The guidelines for valuation of banks'' investment portfolio, requiring them to follow the norms, including mark-to-market, have become effective from the half year ended September 30, 2000.

Public sector banks will be required to annex the balance sheets of their subsidiaries from the year ending March 31, 2001.

The central bank has done away with the concept of "past due" with effect from March 31, 2001, in light of the improvement in the payment and settlement system and upgradation of technology.

Bank Financing of Equities and Investment in Shares

The technical committee appointed by RBI-Sebi has framed guidelines for bank financing of equities and investment in shares. The committee will review the actual working of these guidelines in six months. 

Exchange Earners Foreign Currency A/cs (EEFC) Facility

It has been decided to restore fully the earlier entitlements of 70 per cent and 50 per cent respectively. The EEFC accounts will henceforth be held in the form of current accounts.

Credit Delivery Mechanisms

Banks have been given the freedom of formulating their own policy for charging penal interest rates with the approval of their boards.

A committee representing banks, the government and FCI will be constituted to undertake a review of food credit.

The RBI will evolve suitable guidelines or extending bills discounting facility, especially to the services sector. Technology Upgradation

"Payment System Vision Discount" under preparation, will detail the payment system agenda to be followed in the next 2 to 3 years..

RBI has established an internal group to identify risks and suggest appropriate supervisory and legal framework, suggest measures for adoption of international best practices, recommend adequate systems and suggest a clearing and settlement arrangement for electronic banking and electronic money transfers.

In the four metros, the RBI is all set to introduce Greyscale Imaging Technology as a value added service to members of the Clearing House.

Legal Reforms The RBI is working on proposals for amendments to Reserve Bank OF India Act,1934 and Banking Regulation Act, 1949 for according greater flexibility in the conduct of monetary policy.