Delivering a lecture on the new paradigm for monetary policy at RBI in Mumbai, Stiglitz said that liberalisation of capital markets has witnessed more risk, less prudential behaviour and lesser lending from the banking system.

"There is increasing evidence and theory that capital market liberalisation does not lead to faster growth, but does expose the country to more risk," the Columbia University professor said.

Citing the Chinese example, Stiglitz said that Asian nation has not liberalised its capital markets but still receives the largest foreign direct investment.

"The money that can move in and out overnight does not lead to faster economic growth but leads to instability," he said.

Short term capital flows are often pro-cyclical and reduce government's ability to respond to risks with counter cyclical monetary and fiscal policies, he said.

Stiglitz referred to the East Asian crisis where an inadequate regulatory oversight before liberalisation of capital market led to large ratios of short term debt relative to reserves.

In India, a committee under former RBI Governor S S Tarapore has put in place a five-year plan towards the full float of rupee. As per its recommendations, RBI is phase-wise moving toward the fuller capital account convertibility.