Inter-bank transactions will be compulsorily settled in the euro after January 1, 1999.

The apex bank has admitted that the disappearance of the "in" currencies -- 11 currencies ranging from the Australian shilling to the Italian lira -- from the international financial markets will have implications for reserves management.

"The Reserve Bank has been following a proactive policy in this regard in managing its foreign exchange reserve portfolio. The emergence of the euro may create a shift in the holding pattern of international reserves in its favour. The investment strategy of reserves held in euro, however, depends upon availability of short- and long-terminstruments available in the euro and the yield thereon," the RBI states.

"Operational and systems changes in the Indian banking sector, alongwith a review of its correspondent banking strategy throughout the 15 EU countries, will be required to facilitate transactions in the euro," the RBI observes.

The central bank has clarified that from the viewpoint of continuity of contracts, all existing individual or corporate contracts in any of the "in" currencies can continue in the existing currency till 2002, though through mutual agreement they can be re-denominated in the euro from January 1999.

Exports will be another sector that will be affected as India's exports to EU amount to one-fifth of the country's total exports.

The new currency's movement vis-a-vis the dollar is expected to affect the country's external debt situation. "Around 13 per cent of our external debt is denominated in EU currencies. Transformation of the euro financial market into a broader, deeper and more liquid one is likely tooffer more avenues for cheaper finance to India's corporates," the RBI states.

The RBI has warned that official loans from the EU countries, which have experienced an increasing trend since 1990, may suffer a reversal because of their long-term adjustment needs like moving towards zero-budget deficits, reducing labour market rigidities and increasing demand for public spending in social sectors with the EU.

The momentum of private investment flows from the EU countries will be sustained, the RBI states. "Of the total foreign direct investment in India as at the end of March, 1993, EU countries accounted for around 65 per cent of the share of the union members in the total portfolio investment in India. And as at the end of March, 1995, it was around 50 per cent," it further states.