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High capital inflows: an opportunity as well as a challenge

As you all know, liquidity position in the financial sector has been quite comfortable in the recent times. The buoyant capital market coupled with an appreciating rupee vis-à-vis US dollar has been attracting large foreign institutional inflows during the last two years.
While we have an all time high foreign exchange reserves of more than $130 billion, high capital inflows pose a big challenge to monetary and exchange rate management. In this context, operationalisation of Market Stabilisation Scheme (MSS) has given an additional instrument for liquidity and monetary management. To sum up the challenge, I would like to quote a statement of Dr. Y.V. Reddy, Governor, Reserve Bank of India, which he made at the annual meeting of Bank for International Settlement (BIS) on June 28, 2004. And I quote, "...Special defences need to be put in place for ensuring financial stability in the case of countries like India that are faced with the prospect of volatile capital flows. The issues relating to cross-border supervision of financial intermediaries in the context of greater capital flows are just emerging and need to be addressed."

Technology is the key

As I mentioned in the beginning of my speech, technology has thrown new challenges in the banking sector and new issues have started cropping up which is going to pose certain problems in the near future. The new entrants in the banking are with computer background. However, over a period of time they would acquire banking experience. Whereas the middle and senior level people have rich banking experience but their computer literacy is at a low level. Therefore, they feel the handicap in this regard since technology has become an indispensable tool in banking.

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* Speech delivered by V. Leeladhar, Deputy Governor, Reserve Bank of India to Kanara Chamber of Commerce and Industry, Mangalore on March 11, 2005.