In India, Central Banker Played It Safe

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Given that most Indians still live hand-to-mouth, he said, proposals to give freer rein to investors and banks to do as they see fit could backfire as they did in Southeast Asia in 1997 when the collapse of a credit bubble and a run on the Thai baht led to economic calamity in the region.

“We cannot afford to take the kind of risk that other countries can, because of our large population,” says Yaga Venugopal Reddy, the former governor of the Reserve Bank of India. “As a smaller emerging market economy, I might not be able to get the type of money that is required to get over a crisis.”

Now retired and living in the southern city of Hyderabad, which is geographically and culturally distant from the power centers of New Delhi and Mumbai, Mr. Reddy has no official role in Indian policy making. But he and his views are respected and shared by many political leaders, bankers and economists here.

He dismisses the calls for greater financial reform, which come from economists and some in the government. To be successful in India, he said, regulators must tailor proposals to fit the “time and context” in which they are working.

Right now, he says the government must focus on its fiscal health, invest in infrastructure and improve education, health care and governance. Until India addresses those issues, he said, further financial reforms will not be effective and, in fact, could make it more vulnerable to crises.