In the first place, RBI deputy governor KC Chakrabarty shouldn?t have shot his mouth off. Whatever his views on how inflation should be tackled and at what pace interest rates should be raised, they should have been aired within the walls of RBI. A senior regulator cannot afford to be so indiscreet as to vent to a group of reporters. The move to strip him of his key portfolios and leave him with a few relatively insignificant responsibilities doesn?t seem out of place because Chakrabarty was clearly wrong in speaking up on such a sensitive issue?his comments were heeded by the bond markets?in public. But questions can also be asked about the manner in which the deputy governor has been cut to size.
Was there really a need for a hurried late evening press release? Indeed it?s rather uncharacteristic of the governor Duvvuri Subbarao who usually does things more quietly. In fact, it?s somewhat disconcerting that not so long ago, another senior regulator CB Bhave, chairman, Sebi, acted the way he did when he shot off orders to 14 life insurance companies barring them from selling Ulips. To be sure, there was a case for debating who should be regulating Ulips and Bhave certainly had a point when he pointed out that these products were nothing but mutual fund schemes with the added protection of an insurance cover. But he could have done it differently. The short point is that regulators need to be far more restrained even if they are in the right.
For some reason it would seem that the governor believes he needs to be seen as more assertive and effective. Of late, there is a feeling that he hasn?t been so. In the context of inflation, Subbarao has been seen as not having done enough to bring down prices. Even the recent hikes of 25 basis points in the repo rate and 50 basis points in the reverse repo have been considered inadequate by some. Also, RBI clearly feels its autonomy is being eroded and the finance ministry wanting to assume the role of a ?super-regulator?. The recent Ulip ordinance passed by the government allows for a committee that will be headed by the finance minister to sort out any disputes between regulators in the financial sector. The governor is reported to have requested the finance minister to allow the ordinance to lapse because it would have reduced RBI?s status among financial markets regulators. The current mechanism of the High Level Committee on Capital Markets (HLCC) is chaired by the RBI governor. The governor is probably right and it?s clear the finance ministry does want greater control. With the Bill having been passed in the Lok Sabha, it appears RBI will lose its status as primus inter pares among financial markets regulators such as the Sebi, Irda and PFRDA. The HLCC hasn?t been much of a success and watched almost helplessly as Sebi and Irda squabbled. Even if it doesn?t have executive powers, there could have been some attempt to thrash out a solution but it didn?t really come up with any ideas on the supervision of Ulips. If it did, these were not made known. Nevertheless, clearly, laws should be amended only after debate and all regulators have a right to autonomy, if not actually independent.
However, what has happened in India is that more often than not it?s the bureaucrats who find their way to the regulatory bodies, either while in service or after retirement; coincidentally, or perhaps not really so, the RBI governor, the Sebi chairman, the Irda chairman, the Trai chairman are all from the IAS. And since these officers owe their jobs to the government, especially if it comes post-retirement, they find it difficult not to toe the government?s line. RBI, which has been around for much longer than any of the others, has always exhibited a predilection for greater independence or autonomy when non-IAS officers such as IG Patel, Manmohan Singh, C Rangarajan and Bimal Jalan have been governors. Of course, there have been exceptions but, in a sense, often the heads of various regulatory bodies are themselves undermining their authority. Subbarao, for his part, has stood up to the government; he has questioned the need to amend the RBI Act in a rush, without any debate, since it has worked well enough all these years. But he has erred in the manner in which he has chosen to discipline the 18th floor?s loose cannon. It should have been done with more finesse and less noise. Lost authority isn?t re-established by drama and fireworks. It is quiet firmness that delivers the goods.
shobhana.subramanian@expressindia.com