Regulatory Autonomy

While reading newspapers, i came across regulatory autonomy issue which is becoming the source of headache for the finance ministry. As it again came to light from the Ulip controversy between IRDA and SEBI, so I find it worthwhile to share with you as extracted from the economic times.

Regulatory Autonomy:

Financial market regulators like the Reserve Bank of India, the Securities Exchange Board of India (Sebi) and the Insurance Regulatory Development Authority (IRDA) have their jurisdiction over different segments of the market. Their activities are overseen by the government, though they are supposed to be autonomous - meaning the government will not interfere in their daily functioning or in the rules and guidelines they formulate for market participants. But there is a regular interface between the government and the regulators over several issues.

How does this interface work? 

IN CASE of RBI, its most essential function is that of public debt management on behalf of the government. RBI performs an important function of regulating the volume and the value of money in circulation in the system, both locally as well as globally. So whether and how should the money created by RBI be used for government expenditure becomes an issue of conjecture.

In which areas do regulators interact with the govt? 

There are three areas where autonomy of the regulator interacts with the powers of the legislature - matters of appointment, matters of monetary policy making and matters of finance of public debt, as a whole, maintenance of financial stability of the economy. In matters of appointments, we refer to the extent of the government’s involvement in appointment, dismissal and terms of procedures of central bank top officials and the governing body. Autonomy in financial matters, refers to RBI’s power to manage the limit of its credit to be used for servicing government’s expenditure. Finally autonomy in terms of policy making refers to the autonomy of RBI to formulate and regulate the monetary policy.

Have there been instances of clashes between RBI and the govt in the past? 

THE differences were summarised by former governor YV Reddy in his speech earlier this year. RBI came to be nationalised in 1948. Back then there were minimal areas of conflict as price inflation was modest. But differences have always been there. For example, during the five-year plans in the 1950s, RBI did not approve of financial planning being substituted with “Physical planning”, but it had little autonomy to oppose it. The differences between the RBI and the government led to resignation by Governor Rama Rau. In the ’60s Governor Iyenger identified four areas of conflict between the RBI and the Government - interest rate policy, deficit financing, co-operative credit policy and management of sub-standard banks. But in the post-liberalisation period, the relationship between the two took a new turn. In 1994, RBI and the legislature mutually disabled the ad-hoc treasury bills, the move moderated the magnetisation of government deficits.

Source : ET in class room