Currently, banks are allowed to invest upto 15 per cent of their Tier-I capital overseas. The Reserve Bank has also made it clear that it intends to bring down the cash reserve ratio (CRR) from 10 per cent to 3 per cent in the medium-term and make changes in the statute to make all reserve requirements flexible.

While delivering the keynote address at the third South Asian assembly in Kathmandu, RBI deputy governor YV Reddy said: "The medium-term objective of reducing CRR requirements to the minimum prescribed in the statute, and the longer-term objective of proposing amendments to the statute to make all reserve requirements will be pursued, consistent with the developments in fiscal and monetary conditions."

Reddy said that he will review therestoration of freedom to corporates to hedge anticipated exposures. "However, the issue of restoration of facility to re-book cancelled contracts needs to be reviewed with caution," he added. According to the deputy governor, the extension of facility of forward cover to FIIs is under continuous review although facilities available now were yet to be fully utilised by FIIs.

The RBI deputy governor added that the central bank was implementing the recommendations of the Report on Public Sector Enterprises, which will facilitate the efficient management of their foreign currency risks and also even out lumpy demand and supply conditions in the forex market. Reddy added that he is seriously considering the setting up of Mumbai as a off-shore financial centre.

According to Reddy, the Regulation Regulatory Authority (RRA), will submit its final report in a few weeks time wherein a few regulatory and reporting requirements in the forex market will be simplified, streamlined and rationalised.

The RBI will alsobe setting up a clearing house and design it it on par with other leading clearing systems in the world. According to Reddy, the membership to the clearing house will be open to all authorised dealers (ADs - commercial banks that carry on forex business). The RBI will also be a participating member. The concept of establishing a clearing house was mooted way back in 1994. The scheme was conceived as a multilateral netting arrangement of inter-bank forex transactions in US dollars.

Reddy said that the net position of each bank arrived at the end of each trading day would be settled through the clearing account maintained by the central bank. "The long-term objective is to establish a clearing house as a separate legal entity with risk and liquidity management features, infrastructure and operational efficiency akin to other leading clearing systems,'' the deputy governor said adding that the focus areas of starting the clearing house are legal, risk and liquidity aspects, and operational infrastructure-allof which are under examination by the central bank.

Reddy emphasised reviewing Foreign Exchange Dealers Association of India's (Fedai) role in achieving greater competition, transparency and efficiency in the market.