As the financial crisis of 2008 spread, one nation stood out as a beacon of stability. While most of the world teetered on the brink, officials at the Reserve Bank of India (RBI) steered their country’s economy through the turmoil unscathed, earning widespread praise in the process – quite an achievement in a country whose bureaucrats are routinely criticised, both at home and abroad.

Deepak Parekh, head of India’s HDFC bank, said it best at an India-US CEO summit during President Obama’s visit last November. He noted that while India had much to learn from the rest of the world, “we don’t want to learn from the US financial system, that’s for sure”. Joseph Stiglitz, a Nobel laureate of economics, said that: “If America had a central bank chief like YV Reddy (the RBI governor at the time of the crisis), the US economy would not have been such a mess.”

So what is it about this institution that inspires such reverence from Indians and foreigners alike? It can be summed up in one sentence: The RBI does banking the old-fashioned way. Financial engineering, much in vogue for the past two decades in the West and now much discredited, never appealed to Indian regulators. Instead, they were much more conservative.

“India’s prudence dates back to 1991,” explains Shyamala Gopinath, an RBI deputy governor. “The country was in crisis then, with barely enough cash reserves to pay for any foreign exports.” India’s trade and current-account deficits had left it with only three weeks’ worth of reserves to pay for oil and other items. The country had to pledge much of its gold reserve to the Bank of England and the Union Bank of Switzerland to get a loan. For Indians, gold holds a special place in the house – nothing symbolises wealth and prosperity like it. It was a humbling time for policymakers, and a large proportion of the RBI’s top management witnessed this near-catastrophic event as young and middle-aged officers.

The crisis remains fresh in their minds, as does the anemic economic growth that led India down that path. Now the RBI’s mandate is to ensure that the economy continues its steady march forward while ensuring macroeconomic stability. In practical terms, it has followed a much more prudent banking philosophy than large swathes of the rest of the world.

The RBI has an aversion to derivatives, or “weapons of mass financial destruction” as Warren Buffet called them in 2003. With neither party owning a piece of the underlying asset, he said that derivatives were often designed by “madmen”; compounding the problem, in the US, neither side of a derivative transaction had to be a regulated institution. As a result, derivatives ran amok in the Western financial system, contributing to the 2008 crisis.

The RBI either heeded Buffet’s advice or, more likely, came to the same conclusion. “The RBI requires one of the two counterparties in a derivative transaction to be a regulated authority,” says Gopinath. Moreover, it requires the party to have some commercial interest in the underlying instrument.

The central bank also has an aversion to foreign debt. In the past decade, India experienced year-on-year credit growth of a healthy 25%-plus and so the RBI resisted any further increase in credit sources. Still, with India’s economy booming and interest rates much lower in the West, Gopinath says, “India corporations and Western banks were clamouring for the RBI to ease restrictions and allow Indian corporations to borrow in foreign currency.”

The RBI limited Indian corporations to $500m a year in external commercial borrowings (ECBs). Further restrictions were put on the end use of the ECBs, ensuring as much as possible that they were not used for speculative purposes. Rajeev Malik, the head of south and southeast Asia economics at brokerage and investment group CLSA, says: “Indian corporations were saved by the RBI’s deft regulations.” The collapse of the Icelandic economy is telling, since it stemmed from the 2001 deregulation of Iceland’s banks. Much of this was due to rampant external borrowing by individual Icelanders and the banks themselves.

The RBI further ensures that much of the government’s sovereign debt is held internally within India. This was inspired by India’s 1991 crisis and appears to have been vindicated by the havoc wrecked in east Asia in 1997, Russia in 1998 and Latin America in the 1990s and early 2000s. So while foreign demand may exist for Indian government debt, the RBI much prefers that the debt is held locally.

Finally, the RBI has kept a close eye on the Indian real-estate market. The country’s housing stock demands are manifold and conservative estimates suggest that more than 25 million housing units need to be built in cities.

But India is not Dubai or Las Vegas. What the RBI doesn’t want is a scorching hot real-estate market, therefore it does not allow lending for land. All land purchases must be made in cash and mortgages are capped at 80% of the property’s value. Furthermore, says Gopinath: “The RBI closely monitors the sector and has a sectorial approach to regulation.” So no boom and bust.

Nevertheless, it’s clear from talking to the RBI’s team that this is an institution that’s not afraid of dialogue and an exchange of views. In general, India’s bureaucrats have an instinctive aversion to foreign ideas and thoughts – an “India is different and we know what is best for India” attitude. The RBI is different. Its officers are encouraged to go abroad and learn, be it at the IMF, the World Bank or another multilateral agency.

Visit the RBI website and there are records of hundreds of speeches given throughout India and the world by senior officials. Through a process of engagement, the RBI learns and recalibrates its policies. Which is not to say that it is immune from criticism. Indeed, many complain that reforms to the financial sector have moved much more slowly than they should have. Malik finds it “surprising” that former governor Reddy “could not edge forward on financial sector reforms”. But since the 2008 crisis, much of the criticism has been muted.

It hasn’t all been plain sailing, of course. Take the most recent controversy to grip India, the so-called microfinance scandal. Microfinance – meaning banking services for the poor – took hold in the past decade, turning many microfinance institutions (MFIs) from non-profit organisations into for-profit organisations. Some borrowers, however, complained that the MFIs were using heavy-handed tactics to collect their cash. Since then, politicians have launched a clampdown on the sector, triggering a furious debate over who’s in the right.

In his book Global Crisis, Recession and Uneven Recovery, ex-governor Reddy writes: “There is no direct evidence of any large-scale lending in India that could be characterised as irresponsible or subprime lending. But a study should be made of commercial banks’ lending and support to MFIs that are profit-seeking.” Fortunately, he adds, the sums involved are too small to cause a crisis.

The RBI has one of the most difficult jobs in the world. On the one hand, India is an emerging superpower. On the other, many Indians live a hand-to- mouthexistence. Any inflationary rise in the price of staples such as onions and potatoes would bring much discontent and suffering yet at the same time, strong credit growth – which is inflationary by nature – is necessary to bring India’s masses out of poverty. Navigating those two extremes is what the RBI has to do. So far, it has done so successfully.

Its crowning moment may have been last May, when it bought 200 tonnes of gold from the IMF. While the West was still recovering from the financial crisis, the RBI was adding to India’s reserves. Life had come full circle since 1991, when India had to send 67 tonnes of gold abroad. This time, India was glittering.