India should concentrate on financial liberalisation, Kenneth Rogoff, the outgoing chief economist of the International Monetary Fund, said on Thursday.

Rogoff, who was speaking at a seminar organised by ICRIER, said while India needed to reduce its fiscal deficit and debt levels, it would also have to ease control of the financial sector, especially exchange controls.

He said a study by the research department of the IMF showed that every financial crisis in the world till the Brazilian crisis of 2002 was caused by adherence to a fixed exchange rate.

Referring to India, he said while allowing a flexible exchange rate could lead to a problem of rapid capital inflow, it would also leave the country with enough room to manoeuvre.

Rogoff said India was a silent casualty of the East Asian crisis of the mid-nineties, in terms of growth prospects, as it concentrated on building up buffers to beat back such eventualities.

The economist said though the slow pace of capital convertibility had benefited the country, the massive build-up of reserves raised concerns. He said this cushion had probably dulled the appetite for growth.

Commenting on the forex crisis of 1991, he said India had managed to find "home grown" remedies for it. He added that the crisis was responsible for putting in place the first generation reforms. However, complacency in the economy thereafter had harmed both second-generation reforms and the growth momentum of the economy.

He said the current build-up of excessive forex reserves in India and other Asian countries had retarded demand for goods and services across the world, as these countries were reluctant to spend. The contagion has spread across Europe and the United States, he added.

He said the central bank's intervention to soak up forex had lead to a rise in inflation. However, the policy makers had found it easier to live with such a rise rather than grapple with an appreciating local currency, he said.

Terming it as financial repression, Rogoff said the consequences of such steps had not been analysed by most developing countries.

Analysing the impact of the high fiscal deficit for India, Rogoff said its continued rise had led to fiscal bleed, which in turn had strangulated growth.