Mumbai, Jan 16 (IANS): Reserve Bank of India Governor Shaktikanta Das has said that domestic financial markets must remain prepared for sudden decline going ahead in case risk aversion takes hold among investors globally.

Delivering the Nani Palkhivala Memorial Lecture on Saturday, Das said: "While abundant capital inflows have been largely driven by accommodative global liquidity conditions and India's optimistic medium-term growth outlook, domestic financial markets must remain prepared for sudden stops and reversals, should the global risk aversion factors take hold."

The RBI Governor's statement gains significance as the Indian stock market has surged amid the pandemic and scaled new highs in the past one month, raising concerns of stretched valuations.

This is the second time in a week that Das has raised concerns regarding the bullish trend in stock market.

In his foreword to the Financial Stability report of the Reserve Bank of India (RBI) for January, released last Monday, Das said that the stretched valuations of financial assets pose risks to financial stability.

In his foreword to the Financial Stability report of the Reserve Bank of India (RBI) for January, he noted that banks and financial intermediaries need to be cognisant of these risks and spillovers in an interconnected financial system.

On Saturday, noting that under uncertain global economic environment, emerging market economies (EME) typically remain at the receiving end, he said that in order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators list or monitoring list of the US Treasury.

"I feel that this aspect needs greater understanding on both sides so that EMEs can actively use policy tools to overcome the capital flow related challenges," he said.

He said that RBI is closely monitoring both global headwinds and tailwinds while assessing domestic macroeconomic situation and its resilience.