In a bid to curb speculation in the forex market, RBI has also decided that foreign exchange open positions will carry 100 per cent risk weight with effect from March 31, 1999.

This is the first time that Jalan has spelt out RBI's course of action in relation to forex rate management in a credit and monetary policy statement. He has also made an effort to silence the Cassandras saying the Reserve Bank does not use short-term movements in REER as indicator of appropriateness of exchange rate movements.

"The primary objective of the Reserve Bank and the government in management of the exchange rate is to maintain orderly conditions in the forex market and to prevent the emergence of destablising speculative activities,"Jalan said in his bi-annual statement to the bankers.

It may be recalled that the post-Pokharan developments had led to the rupee touching a lifetime low of 42.70 and RBI had spent nearly $3 billion out of its forex reserves in restoring calm to the foreign exchange market. This had seen a massive dip in the forex reserves to around the $25 billion mark.

Jalan added that to this end the apex bank will continue to closely monitor developments in the financial markets at home and abroad and take such monetary and administrative actions as may be considered necessary. "As before it will ensure that lumpy and uneven demand, particularly for oil imports and debt servicing obligation of government, does not cause any disturbance in the orderly functioning of the foreign exchange market," the governor said.

"Jalan has ensured one thing this time. By reiterating that REER will not be used by the RBI to determine the exchange rate, the governor has put to rest all speculation about this factor," PH Ravikumar,head of forex and treasury at ICICI Bank said.

The RBI released the imputed value of the rupee based on REER which showed that the rupee was overvalued at 41.12 as on October 20, 1998 as compared to the RBI reference rate of 42.29 against the dollar. The RBI used the base year of 1993-94. "The fact that the rupee did not react to this published piece of information shows that the market does not take the REER movement seriously," a dealer said.

The governor said that the RBI does not consider REER to be an effective tool management of short term movements in the exchange rate. "Nevertheless in view of the interest in this measure the Reserve Bank has been publishing movements in the REER of the rupee using trade based weights for 36 months," Jalan said.