The government will make the Reserve Bank governor the vice-chairman of the new statutory joint committee headed by the finance minister to resolve all future disputes over regulating financial products falling under multiple jurisdictions. According to official sources, this will be one significant change that the government would introduce in last month?s ordinance on regulation of hybrid financial products before initiating the relevant legislation in Parliament in the forthcoming Monsoon session.
As per the ordinance, the position of RBI governor as a member in the joint committee is akin to that of the other three regulators under the committee?s purview?Securities and Exchange Board of India (SEBI) chief CB Bhave, Insurance Insurance Regulatory and Development Authority (IRDA) chairman, J Hari Narayan and Yogesh Agarwal, the chairman of pension regulator PFRDA.
This was a big climb-down for the central bank which had?both under law and by convention?always enjoyed a standing higher than that of any other regulator.
The government thinks the amendment would help blunt the criticism that the joint committee would undermine the autonomy of the RBI as monetary authority by divesting it of the primacy it enjoys in the community of regulators.
The high-level coordination committee on capital markets, an existing informal set-up for coordination among the finance ministry and financial sector regulators, is headed by the RBI governor.
The June 18 ordinance empowers the committee to resolve disputes over regulating instruments like currency futures, interest rate futures credit default swaps, all of which the central bank needs to have supervisory control over, to perform its function as monetary authority. However, the ordinance said the committee’s decisions on instruments falling under multiple regulatory domains would be binding on the government and the four regulators concerned, including RBI.
Without being demure, RBI governor D Subbarao recently wrote to the finance minister, expressing concern over the ability of the new mechanism to create ambiguity and doubts where none existed and chose to go public with his dissent. Subbarao pointed out that the respective powers of the monetary authority and the capital market regulator in relation to exchange-traded products were defined clearly under law and there wasn’t really a need to change that.
Under the RBI Act, the central bank can frame the policies for all kinds of financial derivatives (including the so-called hybrid products) as much as it can, in the case of money market instruments and securities. It can also regulate transactions in all kinds of financial derivatives.
Apart from devising monetary policy, the RBI also performs other key functions like ensuring financial stability of the nation and managing the exchange rate.
The alleged infringement upon the regulators’ space by the government, incidentally, comes at a time when internationally, in the post-financial crisis world, the trend is towards according more autonomy to financial sector regulators. Oddly, the RBI which is looking at the spectrum of a loss of autonomy, is widely believed to have done a commendable job in coping with the global crisis for the nation’s financial system.