High gross flows make economy more susceptible to such reversals and as such we need to continue to maintain adequate buffers. In the current context, a high CAD has been absorbing much of the capital flows in aggregate terms. The concerns, however, arise on account of the composition of flows coupled with lower order of reserves accretion and faster increase in external liabilities.
The enhanced exposure to external liabilities is reflected in the sharp increase in the ratio of external debt to foreign exchange reserves from 89.1 per cent of GDP in 2008–09 to 99.1 per cent as at end June 2010. Moreover, the ratio of short-term debt to reserves has increased from 17.2 per cent to 21.0 per cent during the same period.