Reserve Bank of India Governor Raghuram Rajan has said the central bank is ready to give up public debt management in favour of the government as recommended by Financial Sector Legislative Reforms Commission (FSLRC).
However, he opposed several other proposals of FSLRC, and dubbed the recommendation on bringing together some regulators into one entity as “somewhat schizophrenic”.
“There are places where he RBI could give up powers. For instance, if the government wants to manage its own debt, there is no reason for the RBI to stand in the way,” Rajan said here at a conference organised by the State Bank of India.
The FSLRC report was commissioned by the UPA government to examine all laws concerning the financial sector. The report contained three dissent notes on diluting the role of RBI.
All the previous RBI governors, including Rajan’s predecessor D Subbarao, had opposed the government’s proposal to take over debt management functions from the RBI.
“I don’t believe the government suffers any less from conflicts of interest in debt management (unlike the views of the FSLRC), but the RBI could well carry out the government’s instructions without any loss in welfare. I imagine, however, that the government will depend on deputations from the RBI for a while for advice,” he said.
A public debt office will be responsible for the issuance, control, and payment of government securities in compliance to existing regulations.
However, Rajan came down heavily on two areas — oversight of regulators and the size and scope of regulators — dealt by the FSLRC in its report.
On the area of tension relating to the appropriate size and scope of regulators, Rajan said, FSLRC’s recommendations “seem somewhat schizophrenic here”.
On the one hand, it emphasises synergies in bringing together some regulators into one entity. But in the process it suggests breaking up other regulators, with attendant loss of synergies, he said.
“There is no discussion of the empirical magnitude of the synergies gained or synergies lost, which makes the recommendations seem faddish and impressionistic rather than based on deep analysis. Indeed, across the world, we see a variety of organisational structures in existence, suggesting that there is no one right structure. If so, there should be strong arguments for departing from the status quo, which the FSLRC does not provide,” he said.
On the issue of the oversight of regulators, he said the FSLRC suggests laws that do not micromanage, giving regulators the freedom to fill in the details in consonance with the changing needs of the economy. “At the same time, the FSLRC wants to check and balance the activities of regulators through judicial oversight,” he said.
Too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws. We need to find a proper balance, and the balance may vary with our level of development. “I worry we have not thought through this fully,” Rajan said.
According to Rajan, the FSLRC also seems to be inconsistent in its emphasis on synergies and regulatory uniformity.
It proposes all regulation of trading should move under one roof, all regulation of consumer protection should move under another roof, but the regulation of credit should be divided — banks should continue to be regulated by the RBI but the regulation of the quasi-bank NBFCs should move to the Unified Financial Agency, a regulatory behemoth that would combine supervision of trading as well as credit.
“This balkanisation would hamper regulatory uniformity, the supervision of credit growth, and the conduct of monetary policy,” he said.
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