Finance minister Pranab Mukherjee said the world economy is showing signs of recovery, but warned against formation of asset price-bubbles and volatility in the currency market.
"The world economy is showing signs of recovery ... the risks, however, remain and the recovery would be a razor-edge walk, especially because the signs of asset price-bubble and heightened carry-trade activity are re-emerging," he said.
Mukherjee, who is on a two-day visit to Sri Lanka, made these remarks while delivering the fourth LK Memorial Lecture in honour of Sri Lankan leader Dr Lakshman Kadirgamar.
Carry-trade usually refers to speculative trade activities in currencies and commodities. It is feared that speculative capital flows can have adverse implications on the forex and equity markets in the developing nations.
The finance minister's statement comes just a day after International Monetary Fund Managing Director Dominique Strauss-Kahn had warned that the surge in capital flows into the developing countries could destabilise local currencies and asset prices.
"While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilising movements of currencies and asset prices...The resurgence of capital flows into emerging markets, including several in Asia, is presenting policy challenges," Strauss-Kahn had warned.
Mukherjee said the global output is expected to expand by 3.1 per cent in 2010, wherein the developed countries as a group could grow at 1.3 per cent and the emerging and developing economies could grow by 5.1 per cent.
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