global rise in the interest rates, there is always a lurking fear in the emes, that the level of capital flows may not be maintained. thus, the comfort level of reserves should not be viewed with respect to the current situation alone but should also reckon the assessment of the emerging risks. moreover, at this moment, the global economy has not been tested on the eventuality of a not - soorderly correction of the current global imbalances. in that eventuality, as the experts caution, disruption in financial markets in the form of large cross - currency volatility and sharp rise in interest rates are not unlikely in the global economy. to sum up, several factors impinge on the comfort level of reserves and the relative weights assigned to safety, liquidity and return. when, how and through whom should the search for higher returns be pursued, depending upon the level of comfort, is a matter of convenience and context, and options, as appropriate, should always be kept open. thank you.

is important to identify the sources of reserve accretion in this latest episode. there are some countries like russia where the reserves are built out of current account surplus. in countries like china, korea and taiwan, the surplus, in both current and capital account, led to accumulation of reserves. on the other hand, there are countries like india, where the reserves accretion was driven more by capital account surplus and not due to current account surplus, broadly implying that capital inflow was more than what could be normally absorbed in the domestic economy. net capital flows have remained much larger than the current account deficit in india as well as in most of latin america and central & eastern europe. in case the reserve accumulation is due to large capital flows, it may be useful to distinguish between debt and non - debt flows as also between foreign direct investment and generally less stable portfolio flows. in fact, the stock as well as flow in each category would be relevant for reserve management. while the marking - to - market of the assets and liabilities may be difficult, it might not be irrelevant. thus, while the traditional indicators of adequacy of reserves are based on trade, debt and monetary indicators, or even the ‘ guidotti rule ’ or ‘ liquidity at risk ’ rule suggested by alan greenspan may help explain the adequacy of reserves, they need to be supplemented with, what may be described as, multiple indicators to assess the adequacy of reserves of any country at a given juncture. ( iii ) difficulties in computing quasi fiscal cost of reserves a simple method of calculating net cost of carrying reserves to the central bank is the difference between the interest rate on domestic securities and the rate of return earned on the foreign exchange reserves adjusted for any exchange rate change. the magnitude of the cost, which is often difficult to estimate, varies with the extent of sterilisation and the yield differentials. these are termed “ quasifiscal ” costs in the literature since the costs to the central bank are passed on to the sovereign through a lower transfer of profits. in countries where local interest rates are well above international levels, such carrying costs could be positive, while if the reverse is true such carrying costs could be negative. a recent study by the bis has shown that carrying costs are negative in a number of countries at current interest rates. the study states that in china, for instance, the one year interest rate in june 2006 was less than half the comparable us treasury bond