YV Reddy, governor, Reserve Bank of India (RBI) has said that though sometimes it is suggested that encouraging outflows would be a good solution to manage surging inflows, liberalising outflows may not be of great help in the short run, because a greater liberalised regime generally attracts more inflows.

?Hence, while recourse to some encouragement to outflows, such as the liberalisation of overseas investment by our corporates in the real sector is helpful, it has to be combined with other measures to manage the flows depending on their intensity,?? said Reddy in his inaugural address on the issue of Management of Capital Account in India: some perspective delivered at India Econometric Society in Hyderabad on Thursday.

While the immediate focus is on managing excess capital inflows and some volatility in regard to the excess, it will be prudent not to exclude the possibility of some change in course, due to any abrupt changes in sentiments or global liquidity conditions, despite strong underlying fundamentals of the Indian economy, he explained.

Strategic management of capital account would warrant preparedness for all situations, and the challenges for managing the capital account in such an unexpected turn of events would normally be quite different, added Reddy.

?By all accounts, in terms of both growth and stability, China and India, who do manage capital account rather actively, have performed exceedingly well in all the recent years,? said Reddy.

International financial markets do not treat Emerging Market Economies (EMEs) like India as full-fledged market economies but only as economies in the process of marketisation. Hence, financial markets respond differently to the same macroeconomic or political development, depending on whether it is an EME or an advanced economy. Hence, EMEs have to follow a more pragmatic and contextual policy.

Reddy, while releasing the Indian Development Report 2008 (IDR) of the Indira Gandhi Institute of Development Research, said at this juncture, there is no visible immediate threat to financial stability in the country.

?However, RBI recognises the need for continued but heightened vigilance. It is taking timely, prompt, and appropriate measures to mitigate the risks,? he said.