C Rangarajan, Former RBI Governor said the objectives of monetary policy have been growth and price stability amongst others, but the latter should be given priority.
The Financial Sector Legislative Reforms Commission or the FSLRC has called for merging the Securities & Exchange Board of India (SEBI), Insurance regulatory and Development Authority (IRDA) and the pension regulator into one super regulator. It wants all the regulators including the RBI to give clear non-conflicting targets. It also wants a common redressal system for financial sector consumers that reaches the district level and finally, it wants all the regulators to have a common appellate authority.
C Rangarajan, Former RBI Governor said the objectives of monetary policy have been growth and price stability amongst others, but the latter should be given priority. He further clarifies, though the RBI is saying that inflation is at an uncomfortable level, there has to be an idea about the comfortable level. Essentially, that would force monetary authority towards targeting a single number and that according to Rangarajan, can be reached through an ideal price stability.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Should the central bank be given clear inflation targets?
A: We have had multiple objectives of monetary policy even in the older days, we had growth as an objective, we had price stability as an objective and we had other objectives as well. It is very difficult for a central bank to operate with only one objective and this is particularly true of the developing economies. Therefore, growth is essential, growth is important and we cannot ignore it.
Having said that, while I would not say that we need to make inflation targeting as the only objective of monetary policy, I would still urge that the dominant objective of monetary policy is price stability. I think all other objectives need to be kept in mind but they should take a secondary place.
Q: Even assuming that inflation is the dominant goal of a central bank, is it possible to give a level like the central bank has to achieve 5 percent or it has to explain, can we give such monetary targets, such numerical targets already, are we in that stage?
A: We should move towards it but, certainly I think at any given point in time, there should be some indication or the level towards which the monetary authorities are comfortable even in the present context. The Reserve Bank of India (RBI) has been saying that the present level of inflation is uncomfortable.
If you say the present level is uncomfortable, you should have some idea what the comfortable level is. While inflation targeting clearly forces the monetary authority to move towards a single number, I would say that soft inflation targeting in the sense of moving towards an ideal price stability focus is good for the monetary authorities. I would urge that it becomes the dominant objective of monetary policy.
Q: What about capital controls or the exchange rate, this has been something which the RBI is monitoring because the internal value of the rupee is linked to the external value of the rupee but, the approach paper seems to indicate that the capital control should more be in the realm of the finance ministry, would you say that we can remove exchange rate from the radar of the RBI altogether, is that possible?
A: The exchange rate regime of a particular country ofcourse is determined both by the central bank and the government. Ultimately, it is a government which decides what kind of an exchange rate regime we should have. Therefore in that sense, the government has a role to play.
But what happens in the exchange rate market or the exchange market cannot be outside the purview of the central bank. I think the exchange rate has an important role in the system. It has some relationship to price stability, the manipulation or the adjustment at the exchange rate again clearly has implications for the overall status of the economy.
I certainly think that in a developing economy it is particularly important for the central bank to see that the exchange rate of the currency does not appreciate in real terms.
Q: Let me come to the other central point that the paper seems to be making is that regulator should be by rule of law, removed from interference with markets. While that may perhaps work for the SEBI or a capital market regulator, would that be very tough for the RBI because the central bank normally moves in a discretionary fashion?
A: There is a long debate in monetary policy about rules versus discretion and the gold standard regime was a rule based regime. Similarly, there are other regimes which can be rule based. But more and more the central banks have moved towards the more discretionary arrangements but, the whole point is that the discretion should be exercised by central bank in terms of a certain objective, which itself must be clear. You cannot have discretion with respect to the operational freedom and discretion with respect to objectives also.
Q: That will be a very interesting debate but I have to get to the other issues that the FSLRC raises. One of them ofcourse is the unification of the non-banking regulatory entities, SEBI, IRDA and now the PFRDA when it will come into existence, is that a good idea?
A: If the principle is a single regulator then I do not see why banking should be kept out. I think if the principle is not carried to its logical conclusion then there will be a single regulator as UK had. What does recent experience show? The recent experience does not clearly indicate which system is superior.
UK had a single regulator, there also the financial system failed. United States has multiple regulators, in fact even a single institution was overseen by multiple regulators and even then there were problems. But, I would say at this particular point, we are in a nascent stage. Our institutions apart from banking are yet to develop and attain a certain level of maturity.
Insurance has been there for a long period but it is only in the recent period we have had competition. Therefore, at this particular point, I would say that probably individual regulators with respect to the different aspects will be good but, I would still argue that probably there is a case for having a single authority, both with respective and pension.
They are related activities and irrespective of whether two separate regulators are required or not. The other thing which I would say is SEBI is a market regulator and should be a regulator of all markets. I do not think that some market should be governed by certain other institutions. I think if you are a market regulator, the market regulator should regulate all markets.
Q: Let me come to the other institution which the approach paper has spoken about for failing institutions. It speaks of a recovery corporation. There is one argument that recovery corporation should be left vague because if it is there, it could become like a BIFR where a failing institution, the promoters wantonly allow it to fail and therefore a very clear recovery corporation could be a problem. There is also not much international evidence as to how a recovery corporation will work, should we start experimenting with a recovery corporation?
A: All such safety mechanisms have a moral hazard and the very existence of the institutions can create a situation in which there can be a lax control. Therefore, we need to be careful about it, people have talked about it even in relation to deposit insurance or any other type of insurance.
The point that has been made in the developed world has been that the idea of too big to fail has had an impact and therefore, even bigger institutions must realize that they can also fail but the problem with bigger institution’s fail is the systemic risk. Therefore, you need a supporting institutional mechanism to take care of that. It is in that particular context. The creation of institutions, to take care of bigger institutions failing came, it has come in the western context. I think it is relevant to the Indian context and is somewhat feeble at this moment.
Q: The other thing is the appellate authority, SEBI already has an appellate authority, securities has an appellate authority, banking does not have. The idea is to make this into a financial sector regulatory authority that is what the approach paper proposes. You have handled several banking cases and even monetary cases and ECB permission given or not given, the several things that a central bank does, is it possible for all this to be passed on to an appellate authority, is that a good idea?
A: I think some of these are administrative decisions and I do not think that all administrative decisions should go to an appellate authority. If there is a legal interpretation and on the basis of the legal interpretation an action has been taken, then for which there can be an appellate authority. But I do not think it should be made in general. All actions can be questioned and all actions can go to an appellate authority, where quoting a particular legal section an action has been taken in relation to that. I believe that there is some case for an appellate authority.
Q: What about redressal, that is another brave idea that the paper comes out with. It says that there should be a common redressal authority, now we have consumer courts and then some of it goes to the regular courts, if there is a financial redressal authority with representation in every district and scaling up to a central authority, will that work?
A: We introduced a system of ombudsman precisely for this reason and the ombudsman system as far as the banks are concerned have been working since 1994-1995. It has been working and therefore, we can give some kind of a legal status to it. I would think that once again we should not go for an Omnibus institution for a grievance redressal.
Each kind of institution, whether it is banks or insurance companies or pension funds, it should have an ombudsman which is much more strengthened than what it is now and which has separate legal authority or legal sanction behind it. Therefore, people should be able to go to these authorities for a grievance redressal.
The consumer court has its own procedure and in some ways the consumer courts can also intervene. Now in fact some consumer courts have said that they can also look into all the grievances that ombudsman are looking at. Therefore, we need to avoid this overlapping, strengthen the system of ombudsman with appropriate legal backing.