‘India should not lower its guard’

Former Governor of Reserve Bank of India (RBI), Y. Venugopal Reddy, on Wednesday, cautioned the country against lowering its guards even as the U.S. and China are engaged in unwinding the imbalances in their economies.

In his special address at The Triplicane Cultural Academy here on ‘Indian economy and global financial crisis,’ Mr. Reddy said, “We (India) did not contribute to this imbalance’’. Nevertheless, he warned that the way those nations hit by the global financial crisis unwound their economies could hit India.

How these two countries managed their imbalances domestically, how they distributed their imbalances between them and how they transmitted their imbalance to others would all have an impact on India, Mr. Reddy said. Hence, he felt, ``we must be careful so that we aren’t severely hit by their unwinding of their economies.’’

Mr. Reddy underlined the need to have a proper balance between savings and investments. This balance should have correlation to the current account deficit, he pointed out. The former Governor of the Reserve Bank said as the world readjusted to the new dynamics, lot more introspection was happening on the question of allowing free flow of capital. Mr. Reddy said too much foreign direct investment was ``too difficult to digest both qualitatively and quantitatively.’’ He strongly favoured a closer look at the qualitative aspects of the foreign direct investment.

Mr. Reddy said how as the Governor of RBI he had to move against the popular view. In this context, he pointed out how the apex bank during his tenure took a view on the need to regulate asset prices. He said fortunately India did not ``indulge in excesses on the monetary economy front.’’ The ex-Governor felt that too much integration with the global economy also had its negative consequences in the form of higher risk exposure. It was precisely because of this ``we need to have walls constantly,’’ he said. As countries moved from competitive de-regulation to re-regulations, he felt the India should carefully chalk out its own path, taking into consideration the global uncertainties. In this context, he said that a precautionary approach was lot wiser.