UK's chief regulator praises RBI's caution.

Vidya Ram

London, April 15

In a remarkably humble admission, the head of Britain's financial market regulator said that India, in the last decade, had made the correct decision to be cautious about liberalisation of its financial sector, despite immense pressure from outside.

Speaking at the international launch of the former RBI Governor, Mr Y. V. Reddy's new book: India and the Global Financial Crisis: Managing Finance and Money at the London School of Economics, Lord Adair Turner, Chairman of the Financial Services Authority, said that countries such as India had come under immense pressure after the East Asian crisis of 1997, from which the West and organisations such as the International Monetary Fund took the wrong message. “The dominant reaction to the crisis that what went wrong was a lack of transparency and what we needed was more liberalisation rather than less, so long as it entailed transparency,” said Mr Turner, also a former head of the Confederation of British Industry. He praised Mr Reddy's decision, during his tenure as RBI chief in 2003-2008, to resist buckling to that pressure.

“He stood up to the pressure and drove his own course, and stuck to a set of policies that they felt were appropriate to the economy of India,” he said. This included the view that financial markets were different to other sectors and could, therefore, not be the leader of liberalising reforms. “Many are policies we are considering in the West,” he added.

His remarks come as a number of policy makers have admitted that past policies advocating pure liberalisation of the financial sector as a key to growth were wrong. In a huge turnaround, the International Monetary Fund will next week launch a report (already leaked to the press) where it admits that restrictions on capital and foreign investment could be a “useful element in a policy toolkit.”

Mr Reddy's approach has been contrasted with that of the US, with Nobel Laureate Joseph Stiglitz saying last year that had America had a central bank governor like him they “wouldn't be in such a mess.”

Lord Turner said that in particular, he was now looking at the dynamics of credit extension, and had concerns that it was being used again for asset speculation rather than just directed towards helping ordinary people and businesses rebuild their lives.

He said he had been suggesting the “radical idea” that sometimes regulators might need to step in to slow the pace of credit extension, in very specific, occasional instances — “We need to stop the punch bowl before the party gets out of hand.”

(This article was published in the Business Line print edition dated April 16, 2010)
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