Mumbai: Reserve Bank of India (RBI) governor D. Subbarao on Thursday came down heavily on the recommendations of two influential reports that suggested transfer of power to regulate all financial instruments to capital market regulator Securities and Exchange Board of India, or Sebi.
He also said he was against formalizing the structure of the high-level coordination committee on financial markets that consists of 12 regulators and the finance secretary, as that would make the forum “excessively bureaucratic”.
“We need to seriously debate the advisability of such a unification,” Subbarao said, referring to the transfer of regulatory responsibilities to Sebi.
For stability: Reserve Bank of India governor D. Subbarao. Abhijit Bhatlekar / Mint.
He was speaking at a banking seminar, organized by the industry lobby Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association, the apex bankers’ lobby.
Both the Percy Mistry committee report on making Mumbai an international financial centre and Raghuram Rajan panel report on financial sector reforms had suggested Sebi as the sole regulator of derivatives transactions.
Apart from banks and other financial institutions, RBI regulates the money market, the government securities market, the credit market and the foreign exchange and derivatives markets. Only those non-exchange traded derivative transactions are legally valid where one party involved in the transaction is an RBI-regulated entity.
Sebi takes care of exchange-traded derivatives products.
“...Unlike many countries, India has had established procedures for regulation of OTC derivatives,” Subbarao said. OTC, or over-the-counter, products are not traded on financial exchanges.
The most important reason for continuing with the present system, according to him, is “to do with preserving financial stability”. Unlike equity prices, interest rates and exchange rate are key macroeconomic variables with implications for monetary policy and overall macroeconomic stability, he said. Banks dominate the interest and exchange rate markets, which in turn is regulated by RBI.
“By also being the regulator of these markets, the Reserve Bank is in a position to exercise oversight of institutions, markets and products...prevent excessive volatility and maintain financial stability at the systemic level.”
This arrangement, according to Subbarao, has “stood to the test of time” and “protected our financial stability even in the face of some severe onslaughts”.
“This is an arrangement that we should not jettison lightly in quest of a unified market regulator,” Subbarao said.
According to him, an informal structure of the high-level panel of regulators adds more value to the meetings as there are free exchanges of positions, views and opinions.
The Raghuram Rajan panel wanted this panel to be given statutory status to minimize the chance of a financial conglomerate engaging in regulatory arbitrage. A statutory status would also help fix accountability, the committee argued.
It recommended the creation of a body called financial sector oversight agency, or FSOA, to act as a coordinating agency and be backed by appropriate legislation. The existing financial sector regulators such as RBI would be represented in FSOA, which would focus on both macro-prudential and supervisory roles, it said.
“While a formal structure will have the merit of enforcing accountability, the flip side is that it may make the forum excessively bureaucratic and detract from its other value adding features. This is an issue that we must debate further,” Subbarao said, adding that the forum can have a more defined role relating to the oversight of large financial conglomerates.
On a separate note, he conceded that the exit strategy of the monetary easing by the central bank has not been chalked out yet because of the prevailing uncertainties.
“We’ve got to do it at the appropriate time, in the right sequence. It’s not as if I know when we are going to to it and I am not telling the market. We have no clear idea because this is an uncertain situation,” he said.
Reuters contributed to this story.