bank has been disclosing its risk management policy with regard to foreign exchange reserves in its “ annual reports ” for the past several years. to summarize, the country ’ s foreign exchange reserves are managed according to the law ; the reserve bank adheres to the internationally best practices of measuring the reserves and data dissemination standards ; and the reserve bank follows appropriate prudential norms in the management of the foreign exchange reserves. however, of late, there have been suggestions that india should consider setting up a wealth fund on the lines of either a stabilization fund or a swf. as mentioned, the objectives of establishing stabilization funds are to mainly smoothen the revenue flows arising out of volatility in commodity export proceeds. india's export basket is diversified and does not have a dominant “ exportable ” natural resource, which might bring “ windfall ” gains. further, india has experienced consistent current account deficits, barring a modest surplus for a few years. hence, creating a stabilisation fund may not be justified on the basis of current situation. swfs are generally created amidst current account surpluses when the foreign exchange reserves attain a level higher than what is perceived as “ adequate ”. if we follow this global experience, consideration of an swf for india may ideally await “ more comfortable current account ” and “ significantly improved fiscal ” situations. it is sometimes argued that in the context of significant growth in foreign exchange reserves in recent years, the portion of the reserves that is in excess of a certain recommended level may be carved out and invested separately for maximizing returns. in this regard, it is necessary to view the concept of “ excess reserves ” from several angles, including from the perspective of possible real sector shocks to the current account and the nature of capital flows. india is vulnerable to shocks on account of oil price and fluctuations in food grains production, which is still largely dependent on monsoon conditions. additionally, a large part of the capital flows are portfolio flows and a significant component of foreign direct investment is in the nature of private equity or for acquisition of existing firms and not in greenfield projects. in a sense, therefore, capital account shocks, which would be independent of the economic fundamentals of the country or domestic macroeconomic environment, cannot be fully ruled out. concluding remarks to sum up, it is necessary to recognize that stabilisation funds and swfs are playing an increasingly important role in global capital flows. the operations of these funds have generated considerable interest among the policy makers and

##thetical to the free market mechanism. however, there is now a greater appreciation of the need for strong domestic players in all markets and the risks of excessive foreign dominance in any of the domestic market segments are now being acknowledged. 18. while foreign - owned banks, the world over, generally contributed to the liquidity crunch in the context of deleveraging during the crisis, the emerging europe with heavy www. voxeu. org. dependence on foreign banking groups was particularly exposed, culminating in the initiative for coordination of european banks to induce parent banks to maintain exposures to their subsidiaries. as chronicled by the bis annual report, 2009, countries such as hungary, indonesia, mexico and turkey faced huge problems when there were sudden reversals in foreign investment in local bond market. such volatile flows can exacerbate the situation merely through the confidence channel. the time honoured principles that underlie opening up of debt markets to foreign investment are convergence in nominal and real interest rates on a sustainable basis, low public debt / gdp ratio and low fiscal deficit to gdp ratios on a consistent basis. in the context of large sovereign debts, countries with large domestic investors holding sovereign debt are considered to be less vulnerable to attacks by speculators. 19. more generally on the issue of capital controls, there is a growing recognition of the serious challenges for macroeconomic policy on account of large swings in capital inflows over a very short period of time beyond the absorptive capacity of the economy. there are also implications for financial stability in the forms of induced risks of currency mismatches, asset price bubbles and crowding out of domestic financial institutions on the lending side, increasing their risk appetite in search of returns. all these impose significant adjustment costs and complicate monetary and exchange rate management. the recent imf update on the world economy outlook states that “ recognizing that inflows can be very large and partly transitory, depending on circumstances, macro - prudential policies aimed at limiting the emergence of new asset price bubbles, some build - up of reserves, and some capital controls on inflows can be part of the appropriate response. ” completing the markets in india i. corporate bond market 20. the absence of active corporate bond market is generally perceived as one of the key missing market which has also hindered the non - bank funding for infrastructure projects. however, the reasons for this lie more with the deeper structural issues in the economy. traditionally, raising of resources through issuance of corporate bonds