>MACRO MANTRA (MACQUARIE RESEARCH)

The man who saved India

■ This is reformatted text of an article that appeared in India's Business Standard newspaper on 22 July 2009 under the same title. It reviews a recent book, India and the Global Financial Crisis, by Dr Y. V. Reddy, who was governor of Reserve Bank of India (RBI) over 2003–08. This period saw exceptional challenges to macro management, and it was largely owing to the pre-emptive – but unpopular – policies of the RBI under Dr Reddy that India managed to avoid a far more debilitating hit from the global credit crisis. The charts on the left have been added for this note and were not included in the newspaper version.

■ Former RBI governor Dr Y V Reddy’s latest book, India and the Global Financial Crisis, makes for a useful and timely reading, and is a reminder of how pragmatic risk management by a central bank can limit the potential economic damage from shocks. The book is a collection of speeches that Dr Reddy gave during his five-year term as Governor that began in September 2003.

■ The speeches have been padded effectively with a helpful introduction that offers the relevant context around each speech, and an epilogue that offers more insights on the current crisis. The book has a user-friendly grouping of the 23 speeches under eight thematic chapters, each covering an important issue.

■ Particularly striking is the inclusion of a speech about what the RBI means to the common person in a book about the global financial crisis. But that only shows the relative importance of communicating with the public rather than only with financial market participants.

■ Dr Reddy’s tenure as RBI governor coincided with the unexpected surge in India’s economic growth that caught the government and the private sector (including us, market economists) off-guard. The destabilising large volume of capital inflows – which partly contributed to the surge in India’s growth – made matters more difficult for the central bank. India was largely closed financially and hence did not experience the sting from the Asian financial crisis, but last
year’s global credit crisis was different – it almost broke the economy’s back.

■ There is no doubt in my mind that had it not been for the deft handling by Dr Reddy, India could have been a mini version of Iceland, with the economy buckling under overseas borrowing by Indian companies. Indeed, if that scary scenario had played out, we’d be dealing with a far more serious triple whammy – corporate, banking and fiscal crises triggered by the reversal in capital flows and currency crisis.

■ The key areas where things began to clash were when the government seemed to go public about some of its preferences but without being prepared for the consequences of its actions. Thus, the opening of the banking and financial sector was being compromised not by the RBI but by the government’s inability to fix its own finances and cut its ownership in stateowned
banks.

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