Much ink has been spilt criticizing the Reserve Bank of India’s (RBI) conservative approach to financial sector reform. Still, this caution helped India stave off the worst of the financial crisis. Now, with solid signs of recovery, such as industrial output, India is signalling returning to the reform path.
Last weekend, Prime Minister Manmohan Singh emphasized this agenda by noting “gradual, but steady” financial reforms. And that’s just how RBI likes it.
On Thursday, the central bank released comprehensive guidelines on the use of foreign exchange derivatives, suggesting piecemeal changes. Take cross-currency options, where a bank exchanges dollars for yen to hedge against dollar liabilities, which are now allowed. In last month’s policy review, RBI said it would even introduce credit-default swaps, whose entry it had wisely stalled in 2008.
What’s more, this review signalled the end of monetary accommodation and RBI’s focus on a new problem: Inflation. Now that growth is again a certainty, it’s important the central bank keeps an eye on inflation and financial stability.