RBI for super regulator in fin mkt

RBI for super regulator in fin mkt
The Financial Express, August 18, 2009, Page 2

Economy Bureau, New Delhi

Reserve Bank of India governor D Subbarao on Monday flagged the need to develop a super regulator by giving statutory powers to the High Level Coordination Committee on Financial Markets. The committee brings together, under the chairmanship of the RBI governor, the heads of Sebi, Irda, PFRDA and the finance secretary in the finance ministry.

Releasing a book authored by the Prime Minister’s Economic Advisory Council chairman C Rangarajan, Subbarao questioned whether HLCCFM can made a kind of a super regulatory institution tasked to maintain financial stability. Other option that has to be debated is whether this committee can be given an organized, formal structure.

He said ensuring financial stability has to be an ‘explicit objective’ of the government and the central banks. However, he said it was difficult to define financial stability and pin point an agency responsible for ensuring it.

HLCCFM discusses a wide range of issues concerning financial market regulations, how they should evolve. However, the committee does not have any legislative power, which some critics argue reduces its effectiveness and reach. The minutes of the HLCCFM meeting are also not made public. HLCCFM increased the frequency of its meeting after the collapse of the Lehman Brothers in September 2008.

At the release function, which was also attended by Thirteenth Finance Commission (TFC) Chairman Vijay Kelkar, the RBI governor urged that the Commission the must address three critical issues: whether fiscal adjustment over a cycle is a viable proposition in India, secondly, defining the guidelines for recognition of the fiscal deficit and the government debt, and finally, how the should the government achieve fiscal deficit targets outlined by the TFC.

The TFC is expected to come out with is report in October 2009. Subbarao said the TFC must study “why should we (India) do it (fiscal adjustment) over a cycle. This is very neat in theory but does it work in India.” The governor said the TFC should also go a little beyond that pointing out fiscal deficit reduction targets.

“It should also study how it should come about. How much of the fiscal consolidation should come from the tax side and how much from the expenditure side,” Subbarao said, indicating there was a need to control quality and quantity of expenditure.

The governor reiterated that the government’s heavy borrowings programme has come in the way of lower interest rates. He further argued that it would be difficult to roll back the fiscal expansion programmes. The monetary policy will have to willy-nilly follow the fiscal compulsions going forward, Subbarao said, pointing out the difficulty in returning to the process of fiscal consolidation.

On the occasion, Rangarajan said regulating the financial markets will be the most important thing in the days to come. He also highlighted the need to strike a fine balance between financial innovation and financial regulation. Projecting India to grow at 6-6.5% in 2009-10, he said the interest rates may go up slightly towards the end of the year.