"It is time to send a bouquet of roses to Dr. Y. V. Reddy. A really large one." says Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd.
Here he continues...
It is time to send a bouquet of roses to Dr. Y. V. Reddy. A really large one.
As a gesture of "Thank You" from all of us for keeping India afloat at a time when the world is reeling under the weight of a scary global financial crises.
Dr. Reddy retired as the Governor of the Reserve Bank of India on September 5th, 2008 but his acts - and actions - while at the helm of the RBI has, in my opinion, saved India from a total meltdown. The meltdown that we are witnessing in the US and Europe and in countries like Iceland which got carried away with access to low-cost easy money.
Dr. Reddy’s caution was typified by the old-fashioned suits that central bankers wear. His old-cut and boring grey and dark suits were reminiscent of a visit to the house of a disapproving uncle. An uncle who always wanted to know why the child’s hands were dirty and the clothes stained with mud.
The never-ready Dr. Reddy was constantly criticised for not allowing India to dance with the winds of change that had overtaken the global financial markets. The policies of the RBI were often at loggerheads with what the new-age economists wanted. Free markets - they urged - free up banking - free up everything.
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India has been witness to many crises in the past. And some pretty big ones after we began on our own economic reforms in 1991.
There was the Tequila crisis when Mexico went bust in 1994.
There was the Asian Crisis when the magical Asian Tigers went bust in 1997.
There was the LTCM collapse which led to South Korea and Russia going bust in 1998.
In each of these crises, the central bankers of these countries had set themselves up for the fall. They had allowed the companies and banks under their jurisdiction to borrow excessively and rely on foreign capital. While the world was greedy and no one priced risk correctly, all these countries enjoyed boom years. When risk got re-priced – as is being done now – and capital was in short supply, all the Salsa dancers and Tigers sunk into disaster.
But, during those crises, India was still a relatively closed economy. Our total trade with the free world was less than 10% of GDP for a long time. Today it is over 25% of GDP. India is now a more open economy.
The RBI has allowed Indian individuals to invest overseas; they have allowed us to use Indian credit cards anywhere in the world; they have allowed Indian companies to buy companies overseas.
The uncle has had no problem letting the child play in the mud – but he has first used a stick to ensure that the mud is not quicksand.
But that did not make our finance companies happy. Like the finance companies monitored by Mr. Gordon Brown during his tenure, our “Made in India” finance companies wanted India to have access to any and all capital. The colour of money is green, they said, why should the RBI care where it came from.
Thank god, the RBI did care.
Thank god, Dr. Reddy did care.
Unlike the central bankers in Iceland, who must have been so enthralled by that classic line from "Gone with the Wind": "Frankly, my dear, I don’t give a damn"
The top 3 banks in Iceland borrowed US$ 60 billion from the global financial markets. The value of their liabilities is 12x the size of Iceland’s GDP. Their foreign currency reserves are only US$ 3.7 billion.
Now the top 3 banks in Iceland are bust.
And so is Iceland.
It is seeking US$ 8 billion from the IMF, Russia, and some Nordic countries.
If Dr. Reddy had not done what central bankers are supposed to do – the Indian banks would have all been in an Icelandic mess.
To read his full report, click here
