RBI not in favour of two structures for regulations

Taking over from where his predecessor D Subbarao left off, Reserve Bank of India Governor Raghuram Rajan on Tuesday said regulators must be given the flexibility and freedom to regulate.

He cautioned that “too much of checks and balances could completely vitiate the flexibility afforded.”

What this statement could mean is that the central bank is not in favour of creating two structures for regulations. Rajan was speaking at the State Bank Banking and Economics Conclave in Mumbai.

The Financial Sector Legislative Reforms Committee (FSLRC) report has suggested that almost everything the regulator does should be subject to legal appeal. It has suggested the creation of a Financial Sector Appellate Tribunal. 

Strongly disagreeing with the setting up of any such tribunal, Rajan argued that there is already a redressal mechanism available to challenge any regulatory decision by filing a writ petition in the High Court.

He further said that if the regulator does something blatantly wrong, then there are enough checks and balances to rectify that.

Rajan clarified that he is not arguing that checks and balances were not needed.

“So long as the tribunal only questions administrative decisions such as the size and proportionality of penalties, I do not see a problem. But if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator such as the RBI, which has to constantly make judgments intended to minimise systemic risk, will be greatly impaired,” he said. 

His predecessor, D Subbarao, had also strongly opposed setting up such a structure where the decisions of the regulator would be brought into question. The previous government was strongly in favour of implementing the FSLRC recommendation.

The FSLRC also suggested the merging of all regulations pertaining to trading under a new Unified Financial Agency, citing synergies that can be exploited by bringing all trading activities under one platform.

To this, Rajan said he believes that such a view is “too extreme.”

“Silos within a large bureaucratic regulator may prevent synergies from being exploited, while frequent inter-regulatory meetings can allow regulators to capture many of the available synergies between their activities,” he said.

He said it would be a good idea if regulators get together more frequently to discuss and resolve issues proposed in the FSLRC recommendations.

Rajan said there are, however, a few areas where the RBI could give up its powers.

“For instance, if the government wants to manage its own debt, there is no reason for the RBI to stand in the way,” he said.

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