RBI fights back: Hindu Business Line

RBI FIGHTS BACK

The Hindu Business Line, June 20, 2014

Letters

RBI fights back

With reference to the editorial “Regulating the regulators” (June 19), it must be pointed out that the first serious indictment of the FSLRC was made in this paper by SS Tarapore in his article “A plot to destroy RBI” (May 3, 2013). As rightly pointed out in the editorial, it is quite possible that the RBI Governor’s observations may get entangled in criticism in the context of the timing, and the seriousness with which they have been made can get diluted. But, for those who have been following the matter, Rajan’s statements do not come as a surprise. It is a relief that there is some strong leadership in the financial sector.

Not much research is needed to conclude that the finance ministry and FSLRC, in a hurry to resolve certain minor issues, ignored the evolution of the role of the RBI and the care with which the bank has nurtured the financial sector.

It would appear that the Commission did not get an opportunity to understand the present relationship between the RBI and the Governent. The regulatory apparatus and legislations in the financial sector are in working condition. Till Rajan’s emergence, the FSLRC’s effort to re-invent the institutional structure of regulatory bodies had pushed regulators and supervisors with the exception of the RBI to a confused state.

Perhaps the purpose would be served better if the RBI is allowed to function with its present mandate and a coordination committee sorts out issues among the remaining regulators. If the Government’s aim is to reduce the number of regulators, a merger of the regulatory agencies outside the RBI could be considered eventually.

MG Warrier

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The proposal by FSLRC to set up a tribunal to review the RBI and the SEBI’s decision is unwelcome and Rajan’s criticism of the proposal is valid. The RBI’s actions on monetary policy are based on well-established systems and practices. And any policy decision can trigger differences of opinion and may also turn out to be wrong in hindsight. But that doesn't make them subject to review by a tribunal. There is no end to regulations and regulators. So, shall we have a regulator to review the decisions of the Supreme Court?

Sridhar Narasimhan

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Submitted version of MG Warrier's letter:

Commentary

An institution fights back

M G Warrier

In print media, The Hindu group of newspapers has been consistently playing the role of ‘Devil’s Advocate’ without waiting for a congenial time to speak out. The Hindu Business Line through its editorial ‘Regulating the regulators’(June 19) has proved this once again. It was this paper which published the first ever serious indictment of the Financial Sector Legislative Reforms Commission on May 3, 2013. I am referring to S S Tarapore’s article ‘A Plot to Destroy RBI’. The article concluded with the following observations:

“Devil in the detail

The Commission recommends the setting up of a statutory Monetary Policy Committee (MPC) to take executive decisions on monetary policy with each member having a vote and the Chairperson having a veto, which must be explained with a public statement. The devil is in the detail.

There would be only two RBI members and five external members appointed by the Government. The Ministry of Finance nominee would be a non-voting member on the MPC but would articulate the Government viewpoint.

With Big Brother watching over their shoulder, brave would be the external member who would deviate from the Government line. The RBI would be better off with the present arrangement.

The leitmotif of the FSLRC is to charge the gate of the temple of money with iconoclastic fervour. One prays that in this internecine battle, the RBI’s Pretorian Guards fight off the charge of the Commissioners.

One must remember that countries that destroy their central banks destroy themselves.”

 As rightly pointed out in the editorial, it is quite possible that RBI Governor’s observations about FSLRC recommendations may get entangled in incisive criticism in the context of the timing and the seriousness with which they have been made can get diluted in the process. But, for those who have been following the position taken by some of the members of FSLRC and by the RBI top management Dr Rajan’s June 17 statements do not come as a surprise. They rather feel relieved that there is some strong leadership in the financial sector which can defend the right postures consistently taken by the central bank.

Not much research is needed to conclude that finance ministry and FSLRC, in a hurry to resolve certain minor issues, ignored the evolution of the role of RBI and the care with which RBI has nurtured the financial sector. Fed Reserve and RBI function in two different worlds. To say that time is not right for dismantling or truncating the RBI which is doing creditably well as has been admitted in several international forums, would be telling the obvious. 

The dissenting notes recorded by 4 out of 7 members who signed the final report are well-argued documents, which inter alia plead the case for maintaining the basic features of RBI and assert the need for allowing the central bank to carry on with its present mandates. One wonders what motivated the FSLRC Chairman to finalize the report ignoring the difference of views expressed especially by K J Udeshi, P J Nayak and Y H Malegam. 

It would appear that the Commission did not get opportunity to understand the present relationship between the RBI and GOI. The regulatory apparatus plus legislations in financial sector in India are in working condition. It has to be admitted that till Dr Rajan’s emergence as an acceptable leader of the Indian financial sector, the FSLRC’s effort to re-invent the institutional structure of regulatory bodies had pushed the regulators and supervisors with the exception of RBI to a confused state, making the possibility of an intelligent debate on the issue remote. 

The idea of creating a Unified Financial Agency for all financial regulators except RBI, truncating RBI by separating Public debt Management and keeping the agency doing that work (presumably with the same work force) in RBI premises, later UFA subsuming even RBI, all give a feeling that the FSLRC was not allowed to ‘apply its intelligent mind’ and in the eagerness to satisfy all, and so fast, it had forgotten its own original brief. Perhaps, the purpose would be served better, if RBI is allowed to function with its present mandate, a coordination committee sorts out issues among the remaining regulators. If GOI aim is to reduce the number of regulators, after necessary groundwork, merger of the regulatory agencies outside RBI one by one, as work stabilizes could be thought of. The twin goals of one Unified Financial Agency and managing the man-power-related issues that may arise with merger here could be better handled this way.

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