Hands Off!

The RBI’s angst over the Securities and Insurance Laws (Amendment and Validation) Ordinance promulgated last month is understandable. The Ordinance is clearly aimed at establishing the finance ministry diktat over the central bank. The reason is not far to seek.

The RBI has often refused to play footsie to finance ministers (read shortterm political interests). And though the central bank (given its lack of formal independence) has no option but to eventually fall in line with the government’s wishes, its show of spine irks the political class.

Hence the bid to cut it down to size! The Ordinance takes away the first-amongequals position the RBI has traditionally enjoyed vis-à-vis other financial sector regulators.

Worse, it strikes at the root of regulatory autonomy by replacing the existing mechanism for resolving differences (read turf battles) between sectoral regulators — the High-Level Coordination Committee (HLCC) on financial markets chaired by the RBI governor — with a Joint Committee, chaired by the finance minister.

In the new structure, the RBI governor is an ex-officio member, on par with the chairmen of the Securities & Exchange Board of India, Insurance Regulatory & Development Authority and Pension Fund Regulatory & Development Authority, as well as two other government functionaries in the finance ministry.

At a time when there is increasing recognition of the pivotal role of central banks in ensuring financial stability — witness recent moves to strengthen the hands of the US Fed and the Bank of England — the Ordinance is simply retrograde.

The HLCC (and the RBI) hasn’t emerged too well from the recent spat between Sebi and Irda, but that is no reason to junk the existing model for a patently worse one.

Tension between the government and the central bank isn’t unique to India. In a democracy, differences are inevitable , given the tendency of the ruling political class to look no further than the next elections even as the central bank has the luxury of not being bogged down by shortterm compulsions.

Sensible governments recognise the role played by a healthy difference of opinion, backed by technical knowledge and experience, and do not muzzle their central banks. Is ours a sensible government?