##bated. home prices continue to fall, and there is no indication that the bottom has yet been reached. moreover, recently released information suggests that employment and production have weakened somewhat and that banks are tightening lending standards not only for housing loans but also for commercial real estate loans, as well as loans to both businesses and consumers. a slowing of the pace of increase in private consumption is becoming somewhat more evident, but the trend remains moderately upward. business fixed investment, meanwhile, is also continuing its moderate upward trend. in terms of macroeconomic measures to address the situation, the federal reserve has been aggressively lowering its policy interest rate, and the u. s. government has decided on a fiscal package to stimulate the economy, including a tax reduction. although lower growth in the u. s. economy may be unavoidable for the time being, it is likely to return to a path of growth close to potential, as the housing market correction draws to an end, the tightness in financial conditions eases, and the effects of policy measures make themselves felt. the risk should, however, be borne in mind that, if the negative effects from the housing market correction or financial market developments are greater than expected, the u. s. economy may slow further through negative wealth effects, credit tightening, and deterioration in business and consumer sentiment. the euro area economy continues to expand, though the pace of increase is moderating. although export growth has recently decelerated and there are causes for concern, such as weakness in indicators of private consumption and volatility in financial markets, activity in the corporate sector, particularly business fixed investment, remains strong and it is likely that economic growth will continue. as for other regions, growth continues to be robust, especially in china, india, and russia, while the nies and asean economies are also maintaining a moderate pace of expansion overall. thus, the world economy taken as a whole is continuing to expand. however, we need to bear in mind the possibility that, depending on their extent, future disruptions in global financial markets or a slowdown in the u. s. economy may have adverse implications not only for major economies but also for emerging economies. at the same time, attention should also be paid to the risk of inflation. in the united states and europe, consumer prices are continuing to rise due to increased energy and food prices. in china, there are signs of overheating, visible especially in fixed investment, and inflation is rising, with food

larger number of hedging products are available, and the central banks of several south east asian economies pool their resources to counter any attack on their currencies. it is possible that the sentiments that govern the interest of investors in these countries are different from the sentiments of investors coming to india. in brief, the experience of these countries should provide some lessons for us in terms of potential risks. of immediate relevance to us is the impact of their devaluation on export competitiveness if the rupee continues to appreciate. capital inflow 13. capital inflows constitute a major factor affecting the value of the rupee now. with the resurgence in capital inflows, the net surplus on the capital account more than doubled to about us $ 11, 600 million during 1996 - 97, thereby exceeding the previous peak of us $ 9, 695 million touched in 1993 - 94. reflecting these developments, surplus conditions prevailed in the foreign exchange market throughout the year. in general, the policy response has taken the form of partial sterilised intervention through open market operations, liberalisation of capital outflows, raising of reserve requirements and deepening of the foreign exchange market by routing increased volumes of transactions through the market. to prevent appreciation of the rupee, and to protect international competitiveness, the reserve bank made substantial purchases of us dollars in the market. during 1997, the rbi intervened in the spot and forward markets, both in the outright and swap segments. outright spot and forward purchases of us dollars during 1996 - 97 amounted to $ 7. 9 billion and $ 0. 9 billion, respectively. swap purchases amounted to $ 2. 4 billion. while spot sale of us dollars was marginal, forward and swap sales amounted to $ 0. 3 billion and $ 3. 1 billion, respectively. thus, net purchases of us dollars during 1996 - 97 amounted to $ 7. 8 billion. the influx of capital continues during 1997 - 98. the reserve bank has accumulated us $ 3. 9 billion of foreign currency assets until august 8, during the current financial year. total spot and forward purchases and swap sales of us dollars up to end - july 1997, totalled $ 4. 3 billion, $ 1. 1 billion and 0. 9 billion, respectively. thus, net purchases of us dollars by the reserve bank of india up to end july, during the financial year 1997 - 98 amounted to about $ 4. 6 billion. the optimal policy response to capital inflows is very much a