"A modest current account deficit and calibrated capital inflows with a stress on low level of short term debt should be the guiding factors in the management of our external sector," he said delivering a lecture on `Lessons from East Asia' here.

Asserting that the current account deficit of around two per cent, as being maintained now, satisfied the conditions of both required and feasible levels, Rangarajan said the ratio should be maintained at this level to ensure that the liability service ratio was kept below 20 per cent of the total external debt.

Similarly, a close watch should be kept on the borrowings that go into financing the current account deficit. The East Asian crisis emphasised the need for a watch on volatileflows which could have a destabilising impact. Inflow of 'hot money' had to be reined in to ward off financial mismatches that triggered the collapse of East Asian economies, he said. The East Asian economic crisis was a 'contagion' whose capacity to spread across nations had been underestimated, the former RBI governor observed .