Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Rajan on FSLRC: Further Oversight is Overreach, and Back Off a Little, Please


RBI’s Rajan talks about the Financial Sector Legislative Reforms Committee (FSLRC) and specifically, how it works with:

  • Judicial oversight of regulators (meaning: fellow who can overrule us)
  • size and scope of regulators (is it us, them or us+them?)

In the first, Rajan says regulators perform an important function in protecting consumers outside of the court system (where consumers can go for redressal anyhow). An FSLRC “oversight” of RBI or any regulator will have different issues. First, that the oversight tribunal may not be qualified enough to overrule a regulator in the first place. Second, that India doesn’t yet have the kind of case-history to handle most cases, the tribunal will have to judge while learning – and in a lot of ways, a court could serve that purpose anyway. (All regulatory decisions can be appealed in court).

Finally, that the regulator will become a “paper tiger”. SEBI’s become like that for the most part since the SAT can (and has, in many instances) overruled decisions of SEBI. In many cases, because there is an appeal process, even the SEBI decision is not well thought through!

I would agree with Rajan on this. Adding another regulator is not the solution. That’s the kind of solution a Jan Lok Pal would be – adding another layer just prompts the next question, which is, who will regulate THAT regulator?

But we need a lot more in the answerability of the RBI. It is now doing a lot more “forward trading” in the rupee than in the dollar market – in effect distorting the public balance sheet without telling us (since a forward contract is an “off balance sheet” transaction). We need them to be far more transparent about things like this; and then, we want them to take action against banks for mis-selling, order large fines for bad behaviour like denying customers savings accounts, or ensure that banks record and reveal their NPAs immediately. That it is not doing these things makes us believe they need to be more answerable.

The FLSRC report also asked for a unified regulator for trading, for instance. Here Rajan doesn’t want to give up his bond trading turf – where the RBI regulates the bond markets. He says that moving the bond markets out right now would hurt government bond market development, which I will not subscribe to at all.

In my view, there needs to be a different entity than the RBI that engages in market regulation for all sorts of trading, and RBI must only provide financing like it usually does through its liquidity windows. Trading rules, limits and margins should be set by a market regulator (which should be a larger SEBI). Whether foreign investors should (or should not) own debt, is a government issue, not RBI’s. There should be no “SGL” accounts needed – anyone should be able to buy bonds just using a demat account. Player-wise reporting can of course go to the RBI, because it regulates banks.

Yes, this disrupts but it’s just a turf war, and we can get the same people from the RBI to manage the show but as part of SEBI. Specifically, SEBI should fine any bank or player for insider trading, market manipulation or dirty tricks.

The awesome thing is that Rajan encourages the government to manage its own debt. This is required and is an unnecessary burden on the RBI.

He says in the end:

As the Chinese would say, let us recognize the value of crossing the river by feeling each stone before we put our weight on it. Let us not take a blind jump hoping that a stone will be there to support us when we land. Or in American, if it ain’t broke, don’t fix it!

I’ll argue that it’s broke for sure, as a system. The RBI needs to be prepared for change, but it is after all one of the best regulators we have. The organizations that must fear change are IRDA and SEBI, in that order.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial