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Fencing in the RBI _ the Hindu
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Opinion Editorial
Published: April 10, 2013 00:54 IST | Updated: April 10, 2013 13:08 IST
Fencing in the RBI
The final report of the Financial Sector Legislative Reforms Commission has evoked strong responses
The final report of the Financial Sector Legislative Reforms Commission (FSLRC), which was given a wide mandateto draw a blueprint for new financial regulatory architecture, has evoked strong responses. While some have called ita potential game changer, others find its recommendations out of touch with Indian reality. The FSLRC had tograpple with several dissenting views even among its members. Besides, any radical overhaul of existing regulatoryinfrastructure will naturally take time. The most discussed proposal is the one to set up a new regulatory entity, theUnified Financial Regulatory Agency (UFRA), to be solely responsible for the oversight of the securities market,insurance, pensions and commodities, in effect taking over the functions of existing regulators including theSecurities and Exchange Board of India, the Insurance Regulatory and Development Authority and the PensionFund Regulatory and Development Authority. That would result in the financial sector having just two mainregulators, the Reserve Bank of India and the proposed UFRA. Both are expected to coordinate their activities,preferably through an MOU. If that is not new after all, regulators have to work in unison for better results therecommendation that the principal regulators should be board driven and not follow the top down approach thatthey are used to has caused some consternation.
A key recommendation to set up a monetary policy committee which, rather than the RBI Governor, will decide onpolicy rates is arguably the most controversial proposal. This is seen as a not so subtle attempt to clip the wings ofthe RBI, also because of the related move to confer powers on the government to appoint members of thecommittee. However, the RBI Governor will have veto powers on interest rates under certain circumstances andafter making out a case in writing. The bias towards government is even more obvious in the recommendation toappoint the Finance Minister as head of the Financial Stability and Development Council. The RBI has for longresisted encroachment on what it rightly considers to be its jurisdiction. There is no denying that the FSLRC wouldlike to vest greater accountability with the government than with regulators. In its opinion, a major overhaul ofIndias regulatory system for the financial sector is due and best done on the lines suggested by it. But there isbound to be serious disagreement over the validity of a key assumption the report makes on Indias financial sector.Surely systemic failures are due more to excessive financialisation of markets than to failures of regulation, asassumed by the Commission.
Keywords: FSLRC report, financial regulatory architecture, Reserve Bank of India
Printable version | Jun 3, 2013 2:32:16 AM | http://www.thehindu.com/opinion/editorial/fencing-in-the-rbi/article4599112.ece
The Hindu
Fencing in the RBI | The Hindu http://www.thehindu.com/opinion/editorial/fencing-in-the-rbi/article4599...
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