PMEAC chairman backs regulators' autonomy

CHENNAI: The country’s central bank, which is in conflict with the government over issues such as autonomy of monetary policy and on its pre-eminent role in financial stability, has now found a strong backer in C Rangarajan, himself a former governor of the Reserve Bank of India ( RBI) and an influential advisor to PM Manmohan Singh.

Mr Rangarajan, who now heads the Prime Minister’s Economic Advisory Council ( PMEAC), also appears to have waded into the ongoing debate on autonomy of regulators by saying they should not be curbed in any way.

“Any freedom or autonomy of regulators should not be diluted. There should be an apt mechanism to resolve disputes between regulators even while ensuring that the freedom of regulators is not affected,” he said on the sidelines of a function in Chennai on Friday.

Coming from someone whose views are often sought by the prime minister, it should bolster the arguments of the present RBI governor, D Subbarao, who had worked with Rangarajan earlier in the Prime Minister's Advisory Council.
On Thursday, Mr Subbarao had again flagged off the issue of autonomy, or the freedom to conduct monetary policy without being weighed down due to fiscal compulsions.

The RBI has to be mindful of the fact that inflation expectations have to be curbed while the government does not want the growth momentum to be stalled — which may well happen once interest rates go up.

The conflict between the fiscal policy makers and the central bank arises on this count. This has been the case historically and globally, central banks are increasingly facing the threat of fiscal dominance.

According to Mr Rangarajan, an effective mechanism would have to be devised to settle any disputes between regulators.

The dispute resolution mechanism which the former RBI governor referred to has been a bone of contention between the central bank and the government. In the ordinance issued in June by the government to settle the turf issue on regulation of unit linked insurance plans (Ulips), the government had proposed a committee headed by the finance minister to sort out any regulatory disputes.

The RBI however objected to the proposal, which prompted the government to change the structure of the dispute resolution panel.

In the Securities and Insurance (Amendment and Validation) Bill which was approved by Parliament recently, the RBI governor was nominated as vice-chairman, placing him a notch above other regulators. The committee will now be an arbitrator of last resort after the regulators in the financial sector exhaust other options, including sorting out disputes at the High Level Committee on Capital Markets (HLCC).

Rangarajan’s comments come a few days after finance minister Pranab Mukherjee told Parliament that regulators must get over the belief that they are not accountable to anyone.

Talking about microfinance institutions (MFIs) at Friday’s function, the PMEAC chairman said while MFIs have an important role to play in financial inclusion, the high interest rates which they charge could hamper their cause.
“MFIs have an important role to play but it is important to see that the rate of interest they charge is well within the repaying capacity of the customers.

Otherwise, MFIs lose the rationale as an intermediary to provide affordable credit to consumers,” Mr Rangarajan said.

To do this, he said it was necessary for the MFIs to separate pure interest costs from other costs charged to borrowers because of the additional services provided. Mr Rangarajan said commercial banks could also make their rural and semi-urban lending more effective by being more farmer-friendly, ensure simplification of procedures to grant loans to small borrowers and implementation of the business facilitator and correspondent model.

He also said that while there were signs of inflation weakening, it was still high and needs to be addressed by policy makers.