Last Updated : Oct 14, 2012 03:03 PM IST | Source: CNBC-TV18

Ex-RBI guv Bimal Jalan against forming of super regulator

The FSLRC recommends merging SEBI, IRDA and PFRDA into one financial regulatory authority, but according to Jalan, mixing different kinds of financial segments into one regulatory system may not be of much help.

In an interview to CNBC-TV18 Dr. Bimal Jalan, former governor Reserve Bank of India shared his views on the recommendations made by the financial sector legislative reforms commission (FSLRC) to revamp the financial sector.

Dr Jalan has been named by an eminent jury and the CNBC-TV18 Editorial Board for his life-time contribution to the financial sector. The jury referred to his extraordinarily handling of the 1997 Asian currency crisis and the fact that he left the RBI with a sharp increase in reserves despite the fact that the rupee saw a near 25 percent depreciation in the five eventful years when he was at RBI.

The FSLRC recommends merging SEBI, IRDA and PFRDA into one financial regulatory authority, but according to Jalan, mixing different kinds of financial segments into one regulatory system may not be of much help.

"There is some merit in not having a super structure because the same regulator can’t do these different kinds of jobs from morning till evening. They require different expertise and different kind of interventions," he elaborated.

Below is the edited transcript of Jalan’s interview with CNBC-TV18.

Q: Dr. Jalan, clearly you are the best place to comment on whether and how we should change the Indian financial sector’s architecture. First of all, let us begin with FSLRC suggestion to combine the SEBI, the IRDA and the pension regulator into one. Do you think the time has come for us to go in for a financial super regulator?

A: No, I don’t think so. It is a very distinguished group of people and I value their comments, but based on my personal experience I don’t think that it would help to have to mix different kinds of financial segments into one regulatory system.

For example, if you just look at SEBI, the kind of responsibility that it has in terms of your stock markets is widely different from what an insurance regulator will have. In terms of number of insurance companies, in terms of the activities of the insurance companies they are very different. But this is a matter of personal opinion.

What my fear is essentially that if you combine these 4-5 different segments or four segments into one regulatory system then you will have a super structure. You would have four different offices for different regulatory system or different segments for the financial markets and then have somebody on top.

You will get into a system where there will be a passing the buck around if something goes wrong, you have SEBI, you have something else, you have insurance regulator and so on and so forth. So, it needs to be discussed. It needs to be thought about. It is a very distinguished group of people so we have to value their opinion.

But, there is some merit in not having a super structure because what you would find is that the same regulator can’t do these different kinds of jobs from morning till evening. They require different expertise, different kind of interventions.

Therefore I have a feeling that what you would be creating is a super regulatory body combined with four different segments of it in say four sections or four divisions or four ministries as it were and then they will not be able to take some decisions, something happens, some contradictory decisions have to be taken then it will go up to the super structure and it will get back into sort of non-resolvable dichotomy in views, opinions so on. But this is a view; I am expressing this in front of you.

Q: The FSLRC says that financial regulation should follow the rule of law that is one of their primary themes. It says that a regulator before he puts out a rule must justify it with clear objectives. Is this always possible or even desirable?

A: It is a very distinguished group and I value their opinions and I maybe a little biased because of my own experience in the regulatory world. The main question that we have to focus on and I am sure that that will be debated more extensively is, regulation is not entirely a matter of rules because you have grey areas and decisions have to be made based on what you might call trade offs, should I intervene, should I not intervene?

For example you just take it now; you have high inflation, low growth. Should you tighten monetary policy? Should you not tighten monetary policy? That is an issue that all of us are debating. Now supposing you laid to down a rule which says that inflation, let us inflation targeting conundrum, which emerged some time ago, which we dismissed, which we didn’t accept.

But supposing you had a rule that inflation cannot be more than 4 percent or 5 percent, everybody wants that kind of a rule. But if you had a rule, which has to be confirmed with then you would have a tighter and tighter and tighter monetary policy and your growth can be affected. I am just giving an instance to say that lot of times you have to have a matter of judgement.

Q: To continue with how to design the regulator, the FSLRC says there should be clear non-conflicting objectives. Is that possible?

A: For example in the Asian crisis, during the period of the Asian crisis there was a big problem that we were facing. The attack on the rupee, the contagion effect of the Asian crisis on the rupee was enormous. You can’t believe it. The depreciation and the depreciation becomes self feeding. If everybody expects rupee to depreciate then they would buy more dollars.


If they buy more dollars, rupee is likely to depreciate. So, there was a lot of experimentation done during that period of what to do. If you intervene you don’t have that amount of foreign exchange to control the speculators effectively as it were within a short time of say five hours. So, what did we do?

One of the rules which were developed during this course, during the period of Asian crisis was that you intervene when market doesn’t expect you to intervene. That is, let it depreciate and then it hard. So, everybody is buying, at some point they become nervous, so they start selling dollars you hit hard.

Similarly, we have all flexible exchange rates. 1997 for example the IMF wanted to introduce it as an obligation under the rules – capital account convertibility and so on. India moved away from that concept. It was floating but managed exchanged rate and we succeeded. Now that has become the norm. Supposing you had inscribed a rule, that it will be fully flexible then what would you do? Again you will be struggling.

You just see the exchange rate history what has happened in the world. It was first fixed, then there was a Plaza Accord, then you had something else and then finally you had fully flexible exchange rates. You have to respond to the kind of issues that we have. The other problem which I would emphasize is that these things change.

The problem that you have today is very different from the problem that you had seven years ago or ten years ago in terms of management of the exchange rate or in terms of management of the banking system. In the 80s, only public sector banks were there so it did not matter that much. The global markets were not integrated. How do you put a button on these things? So, you have to allow for flexibility. What I am saying is that is an issue which should be debated.

Q: One of the suggestions of the FSLRC is that the regulator and they of course include the RBI I would assume should be given very clear targets. Now is that always possible?

A: No, global experiences are not targetable. In the sense that suppose, inflation is the most interesting thing, or growth is the most important issue for us, now can you target growth rate which would be combined? You just go back to the authorities.

One year ago you were talking about 6-7 percent. IMF was talking about 6-7 percent. Earlier it was 8-9 percent. Now today the IMF says it is 4.9 percent. Can you believe it? What is it that you can confirm to depends on both an opinion, an objective assessment and then sometimes you have to be wrong and then you correct.

This is learning that if you give me a target and I try to fulfill it, I find that this is creating other havoc, related havoc because financial markets are integrated. Then I must be able to change my policy.

Then you would say that it becomes absolutely subjective and how do we judge that you are doing the right thing or wrong thing. You judge me by the results. You judge the outcomes of policies by the results that are we getting a high growth? Are we getting low inflation?

Q: According to you, how will you ensure accountability of regulators? Does it have to remain just vague given the nature of the beast- the financial markets?

A: No I would say that regulator has to be accountable for the policies. But there are so many unknowns, say for example QE in US. I mean could we have said that 3 years ago they would do QE and how much would they do? You take eurozone. What would Spain do what would Greece do, they are wondering about their union? Should it be there, should it not be there?

The whole thing is being debated. So even in these industrial economies which are much less sustainable what you might call to outside pressures of the kind, the developing economies are. Everyday you are seeing new map being drawn as it were. I believe that we should not take a rigid view. Once again let us do what is doable, let us be prepared to change what does not work. Let us judge the regulator or the policy makers by the outcomes, by what do they give you as people of India.


Q: The commission suggests that there should be only one appellate authority for all regulators including the RBI. Do you foresee some problems in referring all of the Reserve Banks decision to a common appellate authority?

A: No, as I mentioned earlier, that they are a very distinguished group. All their views should be taken into account, considered, but based on my own experience what I find is that the different segments of the financial sector require different approaches depending on both – volatility, global integration, size of the markets and so on and what is it that they are doing?

 SEBI – what does the regulator of the stock market do? He doesn’t trade in stocks, he does something different. What does the insurance regulator do? It makes sure that insurance is accessible at reasonable rates to everybody who wants to access, but there is no trading in insurance.

Q: But Reserve Bank has to trade?

A: As far as Reserve Bank is concerned, that policy also varies from time to time and it depends on what the judgment is, in the sense that you have seen both on the exchange rate management, there have been periods when we allow exchange rate to depreciate or appreciate. Then there have been periods where we have been intervening that is as a country, intervening to try and moderate it.

So expectations are formed, expectations maybe wrongly formed, expectations maybe right, my policy maybe wrong and you have to keep the door open but the only point I am making is I am not making any sort of excuse, in a sense whatever I do or whatever a regulator does or whatever a policy maker does is right but you judge us by outcome, that’s my suggestion to you.

Q: You are going back now to the issue of giving targets to regulators. Are you saying that in many sectors targeting will per se be tough?

A: You just take the situation now. You have an issue of both growth and inflation. Now, supposing you give inflation target and a growth target as per the plan what would you do?

Anchor: You may fail on one of them definitely.

A: So, maybe you can say that oil prices are very high, you can say that we had a drought this year. So, you would say that we can provide for exceptions of this kind but there are exceptions or there are developments which we may not be able to completely forecast. You could have said for example, what the demand for oil would be two years ago as compared with now.

Q: For that matter the demand for gold.

A: Yes exactly. You have to go and keep the doors open to be able to change your policy. This is the most important thing.

Q: So, a common appellate authority therefore perhaps may not work you think?

A: Authority is fine. There is no problem in that because then you are accountable and you can be called for explanations and so on. But if we are afraid to take any decision, if we are afraid to change a decision, if you say all the rules must be applied then there is a problem.

Q: FSLRC is talking about a resolution corporation, which will intervene before a finance firm fails. The resolution corporation is being debated even in the west at this point in time because the existence of a resolution corporation may perhaps speed up the destruction of some firms. Often the line between liquidity and insolvency is a very thin one. So, do you think putting in a resolution corporation may actually be dangerous?

A: I have not thought enough about it to be able to comment and let me not comment on this particular issue. Lets debate it, but not with me just now.

First Published on Oct 13, 2012 01:21 pm
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