a way of resolving problems of financial distress, with the authorities playing a major role in the process. indian context while there has been a significant progress towards globalisation in the recent past and policy - wise, there have been impressive initiatives, the extent to which india is globalised is considerably at the lower end of the emerging economies. this indicates enormous opportunities but also challenges in terms of transition from a stage of low base. more importantly, the issue of financial integration and in particular the integration of banking sector has to be considered in terms of overall sequencing in this process of integration with the rest of the world. the overriding issue is not whether to globalise or not, but how best to manage the process of globalization, particularly with a view to accelerating the process at the current juncture where the global outlook on india and india ’ s confidence as well as competitiveness are strong. there is now a consensus among academicians and policy makers that trade liberalization should take precedence over financial liberalisation. even in the context of financial liberalisation, the liberalisation in regard to borrowings in foreign currency should have a lower priority compared to all other capital flows. there is also consensus that the foreign currency exposures of households, corporate sectors and financial intermediaries should be assessed separately and in a continuous fashion to assess the gains as well as the vulnerabilities to the system. in particular, there is a greater recognition of the need to put in place appropriate prudential regulation in regard to the financial intermediaries insofar as foreign currency transactions are concerned in all emerging countries. there is virtual unanimity that the currency mismatches of financial intermediaries is a major source of downside risks of financial integration which can be mitigated by monitoring and regulations. among the financial intermediaries, banks no doubt have a unique place. there is also a strong consensus, globally, on the importance of what have been described as preconditions for capital account convertibility - in particular on the fiscal front and efficiency of the financial sector. in the context of maximising benefits of financial integration and minimising the risks, the link with conditions in the real sector cannot be lost sight of. in china, reforms in real sector preceded reforms in the financial sector and it was possibly the reason for some vulnerability of the latter. in india, reforms in financial sector started early in the reform cycle which imparts significant efficiency, and stability to the financial sector. the financial sector can

by public policies. in managing the process, developing countries face challenges from a world order that is particularly burdensome on them. yet, as many developing countries have demonstrated, it is possible for public policy to manage the process with a view to maximizing benefits to its citizens while minimizing risks. the nature of optimal integration, however, is highly country specific and contextual. on balance, there appears to be a greater advantage in well - managed and appropriate integration into the global process, which would imply not large - scale but more effective interventions by governments. in fact, markets do not and cannot exist in a vacuum, i. e., without some externally imposed rules and such order is a result of public policy. the poor, the vulnerable and the underprivileged will continue to be the responsibility of national governments and hence of concerns to public policy. sound public policies at the national level in countries like ours are very critical in the current context of levels of development and extent of globalization. in brief, it is necessary to recognize that nation - states, as those still primarily responsible for social order in the communities in which people live, have a duty to manage the process of globalization. this challenge is particularly complex in the area of financial services, more so in the case of banks in the larger emerging economies. globalisation in the context of the financial sector at the outset, it would be useful to consider the emerging picture of financial flows as per the latest data released by imf in the context of increasing globalisation. for almost all the years from 1999, the current account balance of advanced economies has been negative and it is estimated to reach us 225 billion in the year 2004 from a positive of us $ 41 billion in 1998. the developing countries, which had a current account deficit of us $ 83 billion in 1998, are estimated to have a surplus balance of a projected us $ 28 billion in 2004. it is interesting to note that while globalization is expected to result in flows of capital from developed to developing countries, it is not clear whether the turn arounds in the current account deficits is a temporary phenomenon. the removal or attenuation of cross - border barriers to trade and capital flows renders assessment of international financial flows that much more difficult to capture in the data. it is also interesting to consider the pattern of net capital flows to emerging market economies. while private net direct investment has been consistently positive and above us $ 100 billion since 1995 to 2003, private net portfolio investment