PURPOSE - Resolve disputes among any of the financial sector regulators in India.
Unlike the existing high-level coordination committee on financial markets (HLCCFM – which is an informal forum), the decisions of a statutory panel are binding. To that extent, the finance ministry becomes the super regulator—and erodes RBI’s autonomy.
It’s time however that RBI too took a close look at itself. For instance, financial inclusion, financial literacy and consumer protection functions can be handled by FSDC; micro regulations part of its job must be taken away and it should get out of its role as the government’s debt manager when India’s fiscal deficit comes down. RBI can concentrate on monetary policy, exchange rate management, payments and settlements and the macro regulations for the financial system as a whole. It also needs to disclose more in its balance sheet. Overall, the regulator needs to reinvent itself.
Consider, what happened to the US and the UK during the financial crisis, the former with a plethora of regulators, the latter with a single super regulator
Neither of these regulatory models was able to save the financial systems in their respective countries from imploding. The one lesson that the crisis has unequivocally taught us is that it doesn’t really matter what kind of regulator you have—it’s the financial system that’s key.
That said, there’s certainly a case for a body that will oversee financial stability. However making the finance ministry the final authority in the financial sector is fraught with risk: consider the numerous handouts to lobby groups in the Union Budget, the large fiscal deficit and the tendency to use banks for political objectives, eg) farm loan waiver. The government already has too much influence over financial regulators and we cannot let it grow any further.
RBI governor D. Subbarao’s recent letter to finance minister Pranab Mukherjee sums up my views on the issue, “the appearance of autonomy is as important as the actual autonomy itself” and “the very existence of a joint committee will sow seeds of doubt in public mind about the independence of regulators.”
