The world knows them as “weapons of mass destruction”. So should India toy with them?
This question has rightfully plagued India’s regulators. The Reserve Bank of India (RBI) in 2007 brought out guidelines for credit-default swaps (CDS), the derivatives that sank AIG. But with the crisis in full swing, it postponed introduction.
The central bank faced ample criticism then for that decision, labelled as it is as a conservative institution obstructing modern finance.
But we think RBI did the right thing then. The instrument, which insures a bond against default, needed more study. And RBI has done the right thing in bringing it back: It put forth fresh draft guidelines on Wednesday, now that it’s better aware of the risks.
For all the flak it gets, RBI has consistently approached financial sector reform with caution. CDS can indeed help make India’s credit markets more robust. But they should be handled with care.