Monday, May 23, 2011

The Unquiet Regulation

In India, RBI has an edge to regulate key financial markets-money markets, government securities market, credit market and forex market besides the usual role of a Central banker. This enables RBI to apply regulatory purview over the interconnected channels between banks and other financial sector entities-but with such unusual regulatory load, do RBI justify its every role as top authority from financial stability perspective? It’s hard to defy the growing overload on RBI-creation of Financial Sector Legislative Reform Council {FSLRC}&Financial Sector Development Council {FSDC} during the last Union Budget have even maximized the RBI’S overtures with Finance Ministry. The mammoth task and hyped expectations forced RBI Governor, D.Subbarao to accept the denial of additional arrival of debt market under the purview of RBI; he even laid stress for divulging the existing power from governor to respective committees on key policy decisions.

Out of conservatism and indeed with many insightful policy measures, RBI has ensured over the years a stable growth of Indian financial market albeit the shade on its autonomy and new circumstances in the post reform era have diminished its earlier touch on crucial policy matters. If RBI knows that despite hard efforts, still half of Indian population is unbanked, so the goal of financial inclusion is distant reality-on the other side, Finance Ministry works on popular temptations of growth instead considering inclusive and stable development of economy. Confrontations of RBI-Finance Ministry, especially in last few years have sharpened and it’s obviously an unfortunate outcome of Finance Minsitry’s intervention in day to day working of RBI. This is a worrying trend and must be checked out before the nerves of Indian financial market will be finally derailed from the esteemed regulation of RBI.

Following the incessant soft touch on credit policy and its ineffective impact on inflation in last few quarters, RBI has increased the Repo and Reverse Repo Rate by 50basis point and deregulated the Saving Bank Deposit Interest Rate. In a recent discussion paper on Saving Bank Deposit Interest Rate {RBI, April 2011}, the reason cited that monetary policy transmission has been suboptimal as it was unchanged since 2003 when the rate was last raised from 3.5% to 4%. As expected banking stocks promising negative past credit policy of RBI, hereafter atleast in short terms, investors will have to cope with the perplex scenarios.

Inflation is much bigger issue and RBI Governor, D.Subbarao sounds very rational when he said there is no quick-fix solution for inflation control in a rapidly growing economy like ours-in a complex economic matrix, it’s truly unreasonable to expect that only monetary policy will ease the pain of inflation. Those who are in political authorities have to realize sooner that inflation is not strictly the sole by-product of demand supply mismatch from the technical parameters of Whole sale Price Index{WPI}& Consumer Price Index{CPI}. The growing cohorts nexus among Corporate, Politicians, Government officials and relentless supply of unclean funds by many routes including suspicious Sovereign Wealth Fund, Participatory notes are making this nation reach in terms of obscene numbers of billionaires and leave majority lagging behind that itself narrates the story of our wounded economy.

Amidst the surging scams, Government/Regulators stand like mute spectators which mark the complete shift of democratic values. There uses to be time, when for a few lakhs rupees of wrong investment, Nehru’s son-in law and MP, Feroze Gandhi started a historic debate in the Lok Sabha [1958}on the state-owned Life Insurance Corporation’s investments in the dubious companies of a tainted industrialist, Haridas Mundhra {The Mundhra affair, Indian Express, December 12, 2008, Inder Malhotra}-though the financial charge was a few lakhs but Nehru’s response was in sharply contrast to what happens these days. He spoke of the “Majesty of Parliament” and instantly ordered a judicial inquiry by one of the most remarkable judges, M.C.Chagla. The inquiries findings led to the resignation of finance minister T.T.Krishnamachari and an exceptional Civil Servant, H.M.Patel. This was the first such case of high official’s sacking Indian democratic history but alas, similar couldn’t replicated here onward and what we witnessed the consistent erosion in democratic values with terrible misuse of power.

In such gloomy parochial atmosphere, it’s hardly surprising to see the working of regulators like SEBI&IRDA which runs like sovereign horse… without any clear mandate or essential /constructive intervention from government. G.Mohan Gopal, a former board member, SEBI has recently highlighted how the SEBI board abused powers to protect Chandrashekhar Bhave {Then Chairmen, SEBI} in IPO scam {2003-06}-it’s an open secret now how the Bhave has stagnated the highly promising Indian Mutual Fund Industry through many ambiguous regulatory changes. He scrapped the load regime that made this sector unhappening in terms of employment &further very unfortunate spate with the insurance regulator, IRDA over ULIP products finally forced the mutual fund business on fringe. Apart from jeopardizing the business, he outgrew the credible impression of fund management in India. Following the too much technical line, no big hope can be conceive from the new Chairmen of SEBI, U.K.Sinha…most of his announcement are equally ambiguous and unusual like predecessor and holds no bright prospects at all. Without any reversal on entry loads, he has plan to widen the geographical spread of mutual fund business, which is completely ironical…another big fatal, he is going to make by pushing the investments by foreign pension and retirement funds on the line of global markets. Ruling out a review on the asset qualities and nature of funds with an extra regulatory shortfalls, here in India, mutual funds’s ordeal is still seems far from being over.

Presently, Indian financial market is grappling with many awkward regulatory instances-a swift appropriation is worthwhile in some area by little more supplementation of regulatory measures and at other end, relaxation to let them work more freely and in accordance to situation instead of popular demands. As the entry of third generation private sector banks and many other reforms are on hold, government must collaborate with regulators much efficiently and without thinking of deviating political compulsions to forward ahead the Indian financial sector from this transition. Integrity and performance by the three regulatory arms of Indian finance-RBI, SEBI and IRDA will decide the overall growth of Indian economy in coming years. The unquiet regulation can lead to dooms, so it’s terrible and undeserving…an efficient regulation instead can further the broader task, so government should choose later and let make the ground clear for good and impartial business. But in meantime, we have to wait to see when and how the financial regulation will be streamlined…
Atul Kumar Thakur
Tuesday, May 23, 2011, New Delhi


  1. Indian financial sector is facing enormous regulatory flaws..a fine analysis with pointing many relevant issues-Ashutosh Thakur

  2. Regulators must have to adjust with the changing scenario in Indian financial the crux of your take with a superb narration-Sumit Ganguly