two words : currency crisis. not only does the currency market ultimately capture the dynamics of cross border asset transactions, it also is treated as an asset with its own dynamics. fema mandates the reserve bank to maintain orderliness in the currency markets, the society disapproves of bis central bankers ’ speeches heightened volatility and economists warn of its adverse consequences. in this backdrop, our approach has been guided by two - if i can use the word - axioms : anyone anywhere in the world with an exposure to the rupee should be able to enter into a derivative transaction to hedge the currency risk, and the transaction should be in the on - shore market. beyond that, we have been endeavouring to expand the set of derivative transactions. we are not ready yet to allow unfettered trading of the rupee for pure speculation. are we ready? 15. now let me come back to the question i posed at the beginning of my discussion. are we ready for capital account convertibility? sometimes i ask myself rhetorically, if a similar question had been asked in 1991 “ are we ready for flexible exchange rate? ” what the considered answer would have been? these questions are difficult to answer. in 1991 our hands were forced by many developments. a currency crisis, global acceptance of the free market philosophy and so on. is capital account convertibility predicated by any such developments or events? 16. as i mentioned earlier, capital flows, first and foremost, are sensitive to macroeconomic policy. therefore, a freely convertible country must have sound, credible, and time consistent macroeconomic policy. what does that translate to, operationally? fiscal prudence and low inflation. where do we stand in respect of these parameters? i wouldn ’ t think we are very comfortable here. both fiscal management and inflation have their own logic and dynamics in a large, diverse, developing country like india. how optimal will it be to throttle social expenditure and blow up interest rates just to attain capital account convertibility? the second threat emanating from capital account convertibility is contagion of disturbance in the global financial markets. the brunt of this has to be borne by the domestic financial system. though tightly regulated, the financial sector, particularly the banking industry is surely not in the pink of heath. 17. therefore the question of readiness for full convertibility has to be expanded to several related questions : is capital control retarding investment and growth of the economy? is any socially useful project

- how transfers, with the intended benefits. however, financial globalisation has also been accompanied by highly - volatile short term portfolio flows, which frequently led to major disruptions to emerging economies ’ financial markets. at the extreme, global financial flows can lead to the build - up of domestic vulnerabilities, such as currency mismatches, external indebtedness and broader financial imbalances. when financial globalisation becomes in itself a source of shock, financial markets can be easily overwhelmed. in malaysia, two - way capital flows have increased by almost three - fold in the aftermath of the global financial crisis. similar to other emerging economies, we have also experienced several episodes of sharp capital flow reversals. supported by firm macroeconomic fundamentals, our deep and broad financial markets were able to intermediate these flows in an orderly manner. the experience of emerging economies in dealing with capital flow volatility underscores the need to always keep our “ own house in order ”. while this is necessary, it is not sufficient. often, we have seen how external developments that are beyond our control, such as the taper tantrum and trade tensions, could trigger periods of sharp capital flow volatility in emerging economies with severe consequences. there are “ innocent bystanders ”. it is therefore imperative that the risks arising from financial openness be better managed. similar to legitimate concerns on trade openness, emerging economies also have legitimate concerns on the negative effects of financial globalisation. more needs to be done to have, to quote imf ’ s christine lagarde, “ safer capital flows ”. allow me to put forward two areas for deliberation. first is on financial safety nets. in this regard, i welcome efforts to strengthen regional and global financial safety nets. to this end, asean + 3 2 / 4 bis central bankers'speeches countries achieved a significant milestone under the chiang mai initiative multilateralisation when the fund size was doubled to usd240 billion in 2014. moving forward, an important consideration is to bring the various bilateral swap arrangements and regional financial safety nets together with the imf ’ s safety net into a coherent framework that will enhance their complementarities and thus, effectiveness in supporting emerging economies in dealing with short term capital flow volatility. second is with respect to domestic policy space for emerging economies in dealing with capital flows. clearly, capital flow volatility poses considerable challenges to emerging economies ’ policymakers in safeguarding financial and macroeconomic stability.