Recent events have provided a stark example of this. Risky flows can reverse and reverse swiftly reflecting global perceptions as they move between risk-on and risk-off states. Emerging markets are very often left dealing with sudden surges of capital inflows and reversals and have struggled to manage the associated impact on exchange rate and interest rates. 9.
These risks were clearly illustrated by the experience in India since the onset of the crisis. As a country with persistent CAD, we needed net inflows of capital.