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Newfinancialcommission:afaultyroadmap
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T.C.A.SHARADRAGHAVAN PRINTTT
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WhilecountriesintheWestaregivingtheircentralbanksmoreauthorityandregulatory
powers,IndiaisproposingasystemtoreducetheRBItoashadowofitself
AmidallthetalkaboutaNewFinancialCode(NFC)and
thehullabalooaboutthegovernmentsapparent
attempttocurtailthepowersoftheReserveBankof
India(RBI),somedeeperquestionsseemtohavebeen
missed:whatistheexactaimoftheproposedIndian
FinancialCode(IFC)?Whatisittryingtofix?Isaneed
forafixatall?
Muchofthediscussionhasrevolvedaroundthe
proposedcreationofaMonetaryPolicyCommittee
(MPC),whichistoberesponsibleforallmatters
relatingtomonetarypolicy.Theargumentinfavourof
anMPCisthat:itisstandardpracticeworldwideto
haveacommitteeinchargeofmonetarypolicy.Sofar,
IndiahasgiventhatresponsibilitytotheRBIand,in
particular,toitsBoardofDirectors.
And,thoughthereisnospecificprovisionforthisintheRBIAct,theBoardhas,byandlarge,entrustedthe
RBIGovernorwiththatresponsibility.So,tothemediaandtothelaypublic,thefactthattheRBIhascutor
raisedinterestratesissynonymouswiththeGovernorhimselfdoingit.
Conflictofinterest
TheproposedMPC,composedofsevenmembers,themajorityofwhomaretobenominatedbythe
government,willtakeoverfromtheRBIallaspectsofmonetarypolicy,includingthesettingofinterestrates.
Thishasriledupalargesectionofeconomists,bankersandcentralbankers.Thegovernment,theysay,should
notbeinchargeofmonetarypolicy.
Thepotentialforconflictofinterestisvast.Sofar,thegovernmenthasbeeninterestedinsecuringhigh
growthrates,notonlyasanelectoralplankbutalsoasameanstofinancevariousexpenditureschemes
proposedineachBudget.TheRBI,ontheotherhand,istaskedwithcontrollinginflation,whichoften
accompanieshighgrowthrates.Raisinginterestratesisthebesttooltoachievethis,butitalsoputsa
dampenerongrowth.
Institutingacommitteestackedwithgovernmentnominees,thus,createsaconflictofinterest.Shouldthe
committeetrytoachievegrowthregardlessofrisinginflation,orshouldinflationbetargeteddespiteslowing
growth?
Muchhasbeenwrittenonthiseventhoughitisjustoneofmanyissues.Torealisetheotherimplications,itis
importanttounderstandwhatexactlytheRBIdoes.Hint:itsnotjustaboutinterestratesofwhichthepolicy
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8/10/2015 Newfinancialcommission:afaultyroadmapOPINIONTheHindu
rateisjustone.
TheRBIsprimaryresponsibilityincludesmonetarypolicy.However,itisalsoresponsibleformaintaining
financialstabilityregulationandsupervisionofbanksaswellasoftheNonBankingFinancialCompanies
(NBFCs).ItalsoaccumulatesandmaintainsIndiasforeignexchangereservesandworksintheforex,
governmentsecuritiesandderivativesmarkets.And,lastbutnotleast,ithastheresponsibilityofhandling
Indiaspublicdebtandcurrencyrates,aswellasheadingtheDepositInsuranceandCreditGuarantee
Corporation(DICGC),whichbasicallyinsuresallbankdeposits.Inaddition,theRBIisthehighestauthority
whenitcomestopaymentandsettlementsystemsinthecountry.
Now,letsseewhattheIndianFinancialCode(IFC)proposes.AccordingtotheCode,theRBIwillcontinueto
beinchargeofmonetarypolicy(viatheMPC)thesupervisionandregulationofscheduledbankscurrency
managementandpaymentsandsettlementssystems.Thereisnoclarityyetonitsroleregardingforeign
exchangereserves,butlackinganymentionintheCode,theassumptionisthatitwillretaincontroloverthem.
TheCodegoesontosaythattheregulationandsupervisionofNBFCs,andactivitiesintheforex,derivatives
andgovernmentsecuritiesmarketswillbeunderaproposedfinancialauthority.Thisauthorityisto
regulateallfinancialservicesotherthanbankingandpaymentsystems,andwillhaveamixofnominated
membersfromboththegovernmentandtheRBI.
RegulationofNBFCs
Incidentally,thereisalreadysomegroundforconflictbetweentheRBIandthisfinancialauthoritynamely,
theregulationofNonBankingFinancialCompanies(NBFCs).TheIFCdefinesabankasafinancialservices
providerinthebusinessofacceptingdepositsfromthepublic.Underthisdefinition,alldeposittaking
NBFCswouldthenbecomebanks.Who,then,wouldregulatethem:theRBIorthefinancialauthority?
TheIFCalsoenvisagesthecreationofaFinancialStabilityandDevelopmentCouncil(FSDC),astatutory
agencyforfosteringthestabilityandresilienceofthefinancialsystem.Otherbodiesbeingcreatedincludea
PublicDebtManagementAgencyandaResolutionCorporation,whichwilltakeovertheroleoftheDICGC.
TheIndianfinancialsectorisgovernedbyahostofdifferentlawsthatwereenactedasandwhenneededto
formvariousregulatorybodiesliketheRBItheSecuritiesandExchangeBoardofIndia(SEBI)andthe
InsuranceRegulatoryandDevelopmentAuthority(IRDA).Eachofthesebodieshastakenawhiletosettle
downandstartworkingefficiently.SEBI,forexample,hastakenabout2025yearstobeeffective.
TheIFCislookingtoamalgamatealltheseagenciesintotheproposedfinancialauthoritythatwilldeemthe
RBIsofarakindoffirstamongequalsasjustoneofthemanyfinancialagencies,withtheGovernorand
DeputyGovernorsbeingdesignatedasChairmanandmembers.
So,whiledevelopedcountriesintheWestarebusygivingtheircentralbanksmoreauthorityandregulatory
powersfollowingthefinancialcrisisinthelate2000s,IndiaisproposingasystemwherebytheRBIis
renderedashadowofitsformerself.IntheU.K.,theFinancialServicesAuthority(FSA)hasbeenbrought
backundertheBankofEngland.BankingsupervisionintheEuropeanUnion(EU)iscomingunderthe
EuropeanCentralBank(ECB),andsimilarmovesarebeingmadeintheU.S.withregardtotheFederal
Reserve.
Separatingbankingregulationfromthatofother,nonbankcreditinstitutionswillcreatemanypossibilitiesof
regulatoryarbitrage,andcouldleadtofinancialinstability.
Overall,thekeyquestiontobeaskedis:whatisbrokenthattheIFCistryingtofix?ThelatestFinancialSystem
StabilityAssessmentUpdatebytheIMF,releasedbackin2013,foundthattheregulatoryandsupervisory
regimeforbanks,insurance,andsecuritiesmarkets[inIndia]iswelldevelopedandlargelyincompliancewith
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8/10/2015 Newfinancialcommission:afaultyroadmapOPINIONTheHindu
internationalstandards.
Whythenthisneedtodestabiliseawellfunctioningsystemintheprocesssidelininganinstitutionthathas
helditsownover80yearsbyrepealing19lawsandcreatingfivenewinstitutions?
Giventhewiderangingandcascadingeffectofsuchapolicydecision,afarfullerdiscussionofalltheissues
andnotjustthoserelatingtomonetarypolicy,isneededitcannotbedrivenbythehobbyhorsesofafew.
sharad.raghavan@thehindu.co.in
Whydestabiliseawellfunctioningsystembysidelininganinstitutionthathashelditsown
over80years?
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