rates of inflation and improved governance in emes. the push factors are the abundant liquidity in the global system and the interest rate differential between the advanced economies and the emes. it is the push factors which trigger volatile capital flows. a possibly unintended consequence of the new round of quantitative easing could be an added impetus to the push factor – increased volatile capital flows into india, just as into other emes, in pursuit of higher returns which come at an acceptable risk. our current account deficit, both in absolute terms and as a proportion of gdp, is expected to be wider this year than it was last year. to that extent, we can absorb larger capital flows. nevertheless, we have concerns about the deficit being financed by volatile capital flows. should capital flows exceed our ability to absorb by a wide margin, we will calibrate our capital control instruments to manage the flows just as we did in the past. our infrastructure investment needs are huge. foreign investment certainly helps. the concern though is that infrastructure, by its very nature, needs long term finance, and volatile flows chasing short - term returns do not meet the need. in order to support infrastructure investment, we have made, and are making, efforts to deepen the corporate bond market. we had also enhanced the limits for fii investment in corporate bonds. foreign exchange reserves beyondbrics reader : should india continue to accumulate usd and follow us interest rate policies? in the name of earning export dollars, maybe we are selling our resources and services for a currency of diminishing value. ds : to deal with sudden stops and reversals of capital flows, a certain level of foreign exchange reserves is necessary. however, india does not have a policy of actively accumulating reserves as a measure of self - insurance. any accumulation of reserves is partly an incidental byproduct of our exchange rate policy which is to check undue volatility in the foreign exchange market so that the exchange rate reflects the underlying macroeconomic fundamentals. incidentally, the increase in our reserves also reflects valuation changes. in this context, it is also important to note that our foreign exchange reserves comprise not just dollars but also other hard currencies such as the euro and the sterling pound [ and ] also gold. managing volatile capital flows beyondbrics reader : what is the rbi ’ s view on taming the disparity between speculative capital inflow ( ” fii ” ) and real investment ( ” fdi ” )?

the rate of growth of structural productivity remains well above its pace of a decade ago. moreover, although recent short - term business profits have softened considerably, most corporate managers appear not to have altered to any appreciable extent their long - standing optimism about the future returns from using new technology. a recent survey of purchasing managers suggests that the wave of new on - line business - to - business activities is far from cresting. corporate managers more generally, rightly or wrongly, appear to remain remarkably sanguine about the potential for innovations to continue to enhance productivity and profits. at least this is what is gleaned from the projections of equity analysts, who, one must presume, obtain most of their insights from corporate managers. according to one prominent survey, the three - to five - year average earnings projections of more than a thousand analysts, though exhibiting some signs of diminishing in recent months, have generally held firm at a very high level. such expectations, should they persist, bode well for continued strength in capital accumulation and sustained elevated growth of structural productivity over the longer term. the same forces that have been boosting growth in structural productivity seem also to have accelerated the process of cyclical adjustment. extraordinary improvements in business - to - business communication have held unit costs in check, in part by greatly speeding up the flow of information. new technologies for supply - chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage - - virtually in real time - - and can cut production promptly in response to the developing signs of unintended inventory building. our most recent experience with some inventory backup, of course, suggests that surprises can still occur and that this process is still evolving. nonetheless, compared with the past, much progress is evident. a couple of decades ago, inventory data would not have been available to most firms until weeks had elapsed, delaying a response and, hence, eventually requiring even deeper cuts in production. in addition, the foreshortening of lead times on delivery of capital equipment, a result of information and other newer technologies, has engendered a more rapid adjustment of capital goods production to shifts in demand that result from changes in firms'expectations of sales and profitability. a decade ago, extended backlogs on capital equipment meant a more stretched - out process of production adjustments. even consumer spending decisions have become increasingly responsive to changes in the perceived profitability of firms through their effects on the