Dr Reddy's legacy of managed float and calibrated capital account convertibility has been proved worth continuing at a time of general instability. It has helped the economy from trouble in thi global financial crisis. The former RBI Governor has received huge applause from the country's top economic advisor for his cautious move in the banking system.

Chief Economic Advisor Arvind Virmani said, "I would say that I told the former (RBI) Governor that his caution with respect to the banking system has actually paid off for the country. Caution in the sense of regulatory opening."

In the light of the experiences over the last decade, it is best to approach financial reforms with caution. Dr Reddy implemented caution in permitting complex derivative products, which yet need to develop expertise in the financial system.

Derivates are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps.

For instance, derivative products such as interest rate futures and currency futures should have been introduced much earlier in Indian markets but can RBI afford to be aggressive with "futures" when the spot market is "inadequate and imperfect" was the question that Reddy always put forward. Like interest rate and currency futures, Reddy would have wanted to have capital account convertibility "yesterday" but that could not have been done as "one needs to have the macroeconomic features in place."

Virmani had sent an e-mail to Dr Reddy where he expressed his feeling. He said, "It has paid off since we face a once in a generation global crisis. Globally this is much worse than the Asian crisis."

The financial crisis in US, the biggest since the Great Depression, has a lesson for India -exercise caution in opening up derivative products and initially permit only those which are exchange-traded, said the economic adviser.

"You have to be cautious. Say, for example, when derivatives are mentioned, the implication to me is that you should try and first open up derivatives which are exchange-traded because those are much more transparent," told Arvind Virmani.

The Central Bank of the country seems to follow the adviser's suggestion and therefore has lately allowed only exchange-traded currency futures, initially with rupee-dollar pare.

In addition, there are other derivative products such as interest rate derivatives and Foreign Currency derivatives that exist in the market but are not exchange traded. Interest Rate Swap (IRS), Forward Rate Agreement (FRA), Foreign Currency Forward, Currency Swap and Currency Option are few of such derivatives.