Let’s call it the paradox of economic reforms. Any crisis in the real economy usually leads to deregulation and a greater dependence on the market. India went through this process in 1991. But any serious crisis in the financial economy is met with calls for regulating and restricting the market. We are seeing this right now in the West.
The Reserve Bank of India (RBI) now says that it will delay issuing the final rules on issue of credit derivatives. The central bank adds that it has taken this decision after seeing what has happened in the West, where credit derivatives are at the heart of the crisis in the US and European credit markets.
Credit derivatives can help banks slice and dice risk— but they can be bombs if they are not handled well. Yet, we hope RBI will not throw the baby out with the bathwater.
There is a larger question that interests us. Does this move signal a wider go-slow on financial sector reform? Remember: A decision on more freedom to foreign banks is due in April 2009.