The deputy governor said that despite the fact that India has weathered the crisis, there can be no room for complacency, the RBI is aware of lurking dangers, and the credit policy announced two days ago has made attempts to install safety valves in the financial markets.

The RBI feels that a distinction needs to made between short-term foreign funds accessed by banks and institutions and other forms of long-term finance. Towards this end, it is in the process of formulating guidelines for banks which will detail facilities that will be given and restrictions that will be imposed, Reddy said.

As part of riskmanagement, banks have been asked to monitor unhedged exposures of their clients by building risk evaluation procedures in their credit appraisal system. The RBI will further strengthen prudential regulations to cover all risks, keeping in view international best practices and India's specific requirements, he said.

With a view to encouraging long-term foreign currency deposits and discouraging short-term deposits, the interest ceiling on FCNR (B) deposits of one-year and above has been increased by 50 basis points and the interest rate on deposits below one year has been reduced by 25 basis points in the credit policy, he said. For accurate market intelligence, the RBI constituted a sub-group on reporting of foreign exchange transactions. The sub-groups recommendations on electronic reporting of details of foreign exchange transactions by selected bank branches have been implemented, the deputy governor said.

To prevent discrepancies about the country's external debt statistics by international agencies,the central bank has set up a technical group on external debt comprising members of the RBI and the government, Reddy said.

He drew attention to the fact that, while liberalisation has gathered momentum, there is need to reconcile deregulation with a stringent regulatory framework to ensure information and trasparency. He also said that it is necessary to review the balance between public and private sector because the latter's failures beyond a certain point will become the responsibility of the public sector. ``Private institutions may be too large to be allowed to fail and in the process may even become too expensive to save. That markets bear the total risk of failure may not to be true beyond a point,'' he remarked.

Elaborating on the dangers of liberalisation, he remarked that if there are no credible international systems to minimise unbearable risks, relationships between national policies and international obligations need to be reviewed. ``The nature and extent of capital account liberalisationwill be dictated by the current search for international architecture for addressing this issue,'' he said. Commenting about macro-economic policies, he remarked that the link between macro policies and micro as well as institutional factors needs to be addressed as macro-economic changes could bring immediate gains but they could easily be threatened by failure to address institutional factors.