IMF endorses India’s financial reforms approach

India’s assertion about its conservative financial reforms having safeguarded it from global crisis has now been endorsed by senior officials of International Monetary Fund (IMF), which has always favoured a more open Indian economy.

These observations are part of the latest report by IMF’s Independent Evaluation Office (IEO) that reviewed the lender’s performance in the run—up to the financial meltdown in 2008.

Noting that the International Monetary Fund provided few clear warnings before the 2008 meltdown, IEO said the agency’s "quality of surveillance” during the run—up was mixed.

“In India, for example, in 2006—07, the IMF was recommending that India continue to move forward with liberalisation of financial markets and the capital account.

“Yet, some senior officials consider that India’s success in weathering the crisis could be attributed in part to its more conservative banking sector and gradual approach to liberalising its capital account,” IEO said.

Unlike many advanced nations that were severely hit by the crisis, India was successful in tiding over the problems and even managed to grow 6.7 per cent in 2008—09 fiscal.

According to RBI’s annual report, released in August last year, India’s financial system remained largely stable against the backdrop of global financial crisis, as banking system was profitable, well—capitalised and prudently regulated.

“On hindsight, it appears that various measures/proposals now being considered globally as a part of the regulatory reforms in response to the crisis were put into practice in India even before the crisis,” it had said.

Prior to the crisis, RBI had kept interest rates relatively high, despite calls from many quarters for lower rates to boost business activities. However, the then RBI Governor Y V Reddy’s stance was vindicated as asset bubbles were mainly due to availability of cheap money.

As per the IEO, for some emerging markets that were running current account surpluses, IMF did not expect crisis in other parts to have an impact on them.

“For these countries, the IMF had expected a decoupling and did not fully recognise the adverse impact of the crisis on them,” it added.

The report said there was a perception among country officials that the IMF was pushing these countries to reduce the pace of accumulation of their excessive reserves —— which helped them to weather the worst of the crisis.

“Some observers presumed that these messages reflected political pressures from advanced economy members to address the global imbalances in a manner that better suited their domestic interests,” it noted.

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