At a time when the world was captivated by fanciful and exotic derivatives, and so-called “hot money" investments, Y.V. Reddy kept India grounded, and against great opposition, ring fenced the Indian banking system as governor of the Reserve Bank of India (RBI) from September 2003-2008. Reddy has been awarded the India Business Leader Award 2009 for his outstanding contribution to India. Excerpts from an interview.

Global reputation: Former RBI governor Y.V. Reddy says India is in a good position to be able to tell the rest of the world that it can be more objective and is in a stronger position even in global debates. Ashesh Shah / Mint

To start with, when I was in the ministry of finance we had to face this 1991 crisis and I was the joint secretary and the whole business of sending gold and getting gold was easily the biggest challenge I would say in my career in the last couple of decades.

As deputy governor, there were two things—one I was trying to develop the financial markets and I think we did quite well. Also, we had to face the Asian crisis and other crises due to the US sanctions etc. But I had an advantage, I always had a governor who could take care of any issues. Both the markets and the RBI had the same shared interest. But as governor, I lost the advantage because there was no governor above me to take care of the problems.

Secondly, I was trying to contain the euphoria in the financial markets and the whole institution was in a way trying to anticipate and take care so that we were not affected by a crisis. So, in that sense, both these types of actions at that point of time, the perceptions between the financial markets and the RBI were slightly different. But still there was no misunderstanding or anything like that.

So overall I think the RBI has come out fairly well both within the country and in terms of its reputation globally.

How are you looking at the world from here on?

Basically, given the global nature and the global transmission that has come about due to global finance, coordinated action was absolutely essential. In fact, the (Joseph) Stiglitz commission emphasised the need for coordinated action. That has been done and the firefighting is over.

So the collapse has been avoided, so that is good news. The exit is going to be a little more complicated but my own feeling is that the complications could be managed with a certain amount of coordination. But the problem is thereafter, what is the normalcy to which you are going when you exit and that should be the new normalcy and that new normalcy should learn lessons from the past and avoid the same mistakes.

And that is where there is not as yet a debate and that new normalcy is something which we have to start worrying about from now on. If we don’t take care of that then some sort of a repeat—not the same crisis but some other crisis may come.

What do you think about opening up real estate and retail to foreign direct investment?

I think that basically the issue is that the real estate market in India is perhaps not that liquid. There are huge 11-12% transaction costs if you want to buy or sell. So when you inject a lot of finance into a real sector which is somewhat illiquid, and you have got the tenancy laws, the real sector itself should be fairly well developed if the financial sector’s business of allocation of resources has to be efficient. That is the first problem.

The second problem is that in the case of activities like real estate it is very difficult to distinguish between FDI (foreign direct investment) and FII (foreign institutional investor) and the lock-in etc., is going to be difficult. Thirdly, whether there is any contribution beyond finance that happens. In FDI, you have to make a distinction between what is known as greenfield and the non-greenfield ones.

So I would say that (in) opening up of FDI for the real sector, you have to look at it in an integrated fashion as to how much of FDI element is there and how much of a portfolio element is there, and how well developed the sector is to be able to have efficient allocation of resources.

What about RBI’s position or at least your personal position in opening up retail to foreigners?

In the case of real estate, I am able to explain because of the various elements of the market. But in the retail market it’s certainly fairly competitive and at the same time this is a lot more related to employment, the output, the multiplier effect and burden sharing. I think it’s not very clear whether a central banker would have much legitimacy in commenting on all this.

Your term ended when a kind of a euphoric period ended for the market. Would you say that was a relief or do you miss not having had to tackle the most difficult problem that came up (after you left)?

Basically, it is just like you just do the job and go on but one thing is there that at least I was not the cause of it.

The RBI was not the cause of it and globally we didn’t contribute to the imbalance and the crisis, so, therefore, India is in a good position to be able to tell the rest of the world that we can be more objective and that we haven’t contributed and we don’t have to do adjustments, so we are in a stronger position even in global debates. So, I am happy to see all this happening from a distance without the stress of doing something about it.