How risk averse is RBI?
Financial Express, 8 May 2009 There is a common caricature in India, that RBI is risk averse, while economic reforms are about risk taking. However, a more careful examination shows that RBI’s strategies have repeatedly involved taking on unacceptable levels of risk for the Indian economy. Example 1: Let’s start with foreign borrowing. The most basic idea in international economics is the notion of `original sin’, where companies and governments get into trouble by borrowing in dollars. A company borrows $100 when the exchange rate is Rs.50 to the dollar. If a sharp depreciation takes place, and it has to repay Rs.7,500 because the exchange rate has moved to Rs.75 to the dollar, it is in trouble. Borrowing in dollars is relatively unsafe; borrowing in rupees is relatively safe. For this reason, economists all over the world have pushed in favour of local currency bond markets. However, in India, RBI has consistently worked to push in the opposite direction. Indian companies do substant
