Given foreign exchange market equilibrium, the interest rate parity condition implies that the expected return on domestic assets will equal the exchange rate-adjusted expected return on foreign currency assets.
As per the amendments, the banks will be allowed to recognise part of their real estate assets, foreign currency assets and deferred tax assets as capital with suitable hair cuts.
In a country with strict foreign exchange regulations, the demand for foreign currency will be satisfied in the holding of foreign currency assets abroad and outside the domestic banking system.
