Even so, with an increasingly open economy, on both capital and current accounts, the need for reserves to cushion orderly development of the economy from changes in the external environment has increased.

The recent crisis in east and south-east Asia has brought into sharper focus the need to maintain high levels of reserves to counter the increased volatility in short term capital flows.

Inflows and outflows need to be carefully monitored and calibrated at all times to forestall the threat of a serious decline in resources, the Survey has cautioned.

India needs to maintain a positive stance towards direct foreign investment in order to strengthen the balance of payments and to garner more foreign savings to support the investment needs of the economy.

Thefinancial crisis in south-east Asia has affected foreign investment flows to emerging market economies and other developing countries. Large inflow of direct foreign investment will enable India to sustain a higher current account deficit without imposing an excessive burden on the external debt management. Hopefully, capital flows are expected to be sustained in India and there remains considerable potential for higher direct foreign investment.

The Survey has pointed out that the financial crisis in south-east Asia has re-emphasised the significant challenges and risks involved in moving to free international capital movements.

The lessons of crisis demonstrate that capital account liberalisation should be carried out in a phased and deliberate way so as to minimise the risks of disruption during a period in which all participants learn to deal with new challenges and uncertainties.

The Survey shows, reflecting the developments on current and capital accounts of BOP, that the foreign currency assetsof RBI rose from US $ 17 billion at the end of 1995-96 to US $ 22.4 billion at the end of 1996-97. They rose further to reach the peak of US $ 26.4 billion at the end of August, 1997, and declined subsequently to US $ 24 billion by the end of December 1997 but rose again to US $ 26 billion at the end of March, 1998.

India's economic fundamentals are reasonably strong. External debt at the end of September 1997 stood at US $ 92.9 billion, marginally above the end-March 1997 level of US $ 92.2 billion. External debt as a percentage of GDP declined from about 26 per cent at the end of 1996-97 to about 24 per cent at the end of September 1997.

Short-term external debt as a proportion of total external debt was only 7.3 per cent at the end of March, 1997 and has declined to 6.3 per cent at the end of September, 1997.

Debt service payments, as a proportion of current receipts, which was over 35 per cent in 1990-91, had declined gradually to about 21.4 per cent in 1996-97 and it is estimated to decline furtherto about 18 per cent in 1997-98.

Short-term debt has repeatedly appeared as an important risk factor in the precipitation of a foreign exchange crisis, especially when coupled with high or unsustainable current account deficits. India, however, is comfortably placed vis-a-vis other major debtor countries, with one of the lowest ratios of short term to total. The country also has a relatively low short term debt to reserves ratio.

India's external indebtedness position has also improved in the global context. According to World Bank Global Development Finance, 1998, India ranks eighth among developing countries in terms of total indebtedness, down from the sixth position a year earlier.

Nevertheless, external debt management will continue to be a priority. The main planks of external debt management policy should continue to stress on high growth rate of exports, keeping the maturity structure as well as the total amount of commercial debt under manageable limits, keeping tight control on short-term debtand encouraging foreign investment.

Given the volatility in the currency market, the Survey has stressed that the key priorities for macro-economic policy will have to be pragmatic and flexible exchange rate, careful monetary management, control of the fiscal deficit and accelerated reform and strengthening of the financial sector, especially banking and insurance.