Anne Krueger, first deputy managing director of International Monetary Fund, has suggested a more flexible approach for the use of foreign exchange reserves by India instead of piling it up indefinitely.

However, she said being a country-specific decision, it will require macro economic adjustment so as not to destabilise the economy.

Krueger was at the National Institute of Bank Management in Mumbai for delivering a lecture on "A turbulent surge? International capital flows and Indian policy response".

On the exchange rate policy of India, she said, "I think the exchange rate policy needs to be more flexible, and after a while it is desirable to have authorities intervene less than what they do now."

On the strengthening of the euro against the dollar, she commented that the euro-dollar exchange rate has come back to the original levels.

Besides, a weakness in dollar is not a concern for the world. "We will argue to a certain extent that you are not getting growth in Europe and Japan. Given that if you see fast world recovery, the weakness in dollar might reverse. As of now, there is no need to tinker with the interest rates in the US as there are no inflationary trends observed," she said.

While she argued in favour of trade and capital flows, on free flow of labour she said it might not be desirable at this point of time as Europe is suffering from a recession and the domestic industry will suffer.

Krueger said that the global economy is poised to expand as the downside has minimised over the years, nevertheless risks have not been eliminated altogether.

In the forthcoming economic outlook to be released by the IMF in April, the perception on India stands to get better, she said.

Cancun meeting as well as Doha experience had been disappointing and the participants failed to recognise the fact that two-third of the benefits of trade negotiations go to developing countries.

She further lauded the fact that India is a leader in the developing world but the level of protectionism is still high to reap the maximum benefits of trade negotiation.

Therefore there should be further opening up of the capital account even if the Tarapore committee prerequisites for capital account convertibility were not met.

However, the conditionalities of a strong financial system, inflation target and fiscal balance are in line with the fund's approach.

A reduction in fiscal deficit is possible through sustained growth, job creation and poverty alleviation. With higher level of debt, vulnerability to crisis increases, she added.

Citing the contagion effect of the east Asian crisis, she said economies suffered not because of contagion but inherent weakness in the financial infrastructure.

Free movement of capital along with free trade and fewer controls will provide better opportunities for trade and spur productivity and growth not at the cost of losing jobs.

Citing the examples of Singapore, Taiwan, Korea and China, she said these economies have witnessed immense growth tracking foreign investment, capital inflows and less control.

Considering the case of China, she said that the banking sector needs to be reformed if they want to achieve increased rate of growth. Large fiscal deficit financing is detrimental to growth and increases the country's vulnerability to growth.

The fixed exchange rate mechanism has led to currency mismatch and weak banking system, and countries, which suffered from these include Russia, Brazil, Turkey, Indonesia.