The status quo—a phrase originally used by diplomats to settle wars—isn’t something to be trifled with. If, let’s say, it has survived the test of the worst global financial crisis since the 1930s, should we hurriedly change it, in India’s long war over regulatory turf?

That, in essence, is the question Reserve Bank of India (RBI) governor D. Subbarao has been asking the finance ministry, first, over the 18 June ordinance that attempted to settle the dispute over unit-linked insurance products (Ulips) between the capital markets and insurance regulators and, second, over a discussion paper authored by the finance ministry on a new proposed regulatory body—as Mint reported on Tuesday.

Illustration: Jayachandran/Mint

No matter how many assurances finance minister Pranab Mukherjee provides—as he did on Tuesday in Mumbai—such a regulatory shift could cripple RBI’s credibility. As Subbarao wrote in a letter to Mukherjee, just the “appearance of autonomy" for regulators is important. That’s why RBI is recommending that the finance ministry let the ordinance lapse. Go back to the status quo antebellum: what it was before the battle.

But why did the ministry alter the status quo in the first place? Perhaps it thinks something was lacking. The high-level coordination committee (HLCC) on financial markets chaired by the RBI governor, which so far has handled such issues, has been informal and lacks statutory teeth. Where RBI thinks that it’s precisely these facets that have allowed regulators to frankly resolve their differences of opinion, the finance ministry would insist otherwise.

Its discussion paper on the Financial Stability and Development Council, the body Mukherjee mooted in his February Budget, has also questioned the old coordination mechanism. It recommends a new bureaucratic layer to monitor financial stability, even criticizing the current regulatory order where RBI plays a big role.

Such recommendations aren’t new. In the years before the financial crisis, it was fashionable for committees and commentators in India to argue for super regulator-like entities. India, then, resisted those changes.

But should the status quo be rigidly upheld? Not only is there scope to improve the HLCC, it can be argued that regulatory spats could be settled through an external arbitration panel. But it’s really not clear whether the government itself can play the role of an honest regulator, particularly when it owns 70% of the banking industry.

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