The decision to raise capital-adequacy levels, and increase risk weightings, will certainly strengthen financial entities, but will also raise the cost of capital. Whether this increase will be passed down to borrowers, be they government or private, or be taken from margins will take time to emerge. For now, however, the decisionto leave rates unchanged is to be welcomed. The recent increase in inflation is more a product of supply pressures which tighter rates will do nothing to alleviate. These pressures should abate in the coming months and, with the east Asian crisis easing, we may be in for a period of both interest and exchange-rate stability. This will be welcome news for industry which continues to be subdued, and had been showing concern that rates may have risen to combat inflation.

Comments on the replacement of general-finance facility, and the introduction of interest-rate swaps are also a welcome development for domestic money markets. They should help in adding real depth to short-term trading and in giving ALM committees real hedging tools. Such developments are essential as the emphasis on risk management is rightly increased.

Perhaps the biggest surprise from the review was the very plain message that the centre must take measures to significantly reduce the fiscal deficit over the next two to three years, ifthe improving viability of banks is not to be threatened. The introduction of a 20 per cent risk weighting on investments in government-guaranteed securities of state undertakings which are not part of the market-borrowing programme is a further sign that fiscal discipline must be improved. The introduction of these concerns into the public forum is a very positive step, and should help reduce some of the concerns of overseas investors.

In summary, I feel the measures announced, while unsurprising in certain areas, have been extremely timely and warmly welcome such prudence at this time.

Dyfrig John

Chief Executive Officer

HongkongBank - India