Abstract
As the threat of the global crisis receded in India, issues of financial architecture have become dominant, with the inception of the FSDC and the announcement of the FSLRC. We make out a case for a highly calibrated approach to the far-sweeping agenda marked out by the HPEC and CFSR (and largely but also more cautiously) endorsed by the FSLRC, especially as regards three issues: (i) the shift towards a principles-based system of R&S, (ii) instituting an integrated financial supervisory system and (iii) divesting the RBI of its banking supervision and public debt management responsibilities. The future success of financial reforms in India will be crucially contingent upon how successfully the regulatory architecture adapts to the competing dictates of financial development and financial stability, and the extent to which the regulatory and supervisory system succeeds in maintaining its independence from the government as well as market participants.
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Notes
- 1.
The process of financial liberalization is usually viewed as encompassing four dimensions: (i) financial deregulation, (ii) financial innovation, (iii) market making and (iv) financial supervision.
- 2.
Several examples of regulatory gaps and overlaps are furnished in CFSR (Chap. 6).
- 3.
The list of responsibilities would be both macroprudential and supervisory and include periodic assessment of macroeconomic risks, the monitoring of large systemically important financial conglomerates and arbitration on inter-regulatory conflicts.
- 4.
Similar remarks apply to the supplementary recommendations.
- 5.
Rules define boundaries ex ante, while principles define them ex-post (Kaplow 1992).
- 6.
Principles generally place more discretion at the hands of the regulator as compared to rules (Nelson 2005).
- 7.
According to Ghoshray (2006), “Anchored in the text, structure and history of the statute, textualism seeks the most literal meaning, free from the perceptive idealism of broader social purpose”.
- 8.
Unit Linked Insurance Plans (ULIPs) are similar to mutual funds with an added insurance component. In August 2009, a turf war erupted between the SEBI and IRDA over an order issued by SEBI banning 14 insurance companies from issuing ULIPs, with the IRDA countermanding this order. The matter was ultimately decided in favour of the IRDA through government intervention in June 2010.
- 9.
Firstly, such an arrangement would overload the central bank with too many diffuse responsibilities. Secondly, since responsibility for the different market segments would most likely be vested in distinct departments of the central bank, old inter-regulatory rivalries and differing mindsets are likely to be now internalized interfering with the primary responsibilities of monetary and financial stability.
- 10.
- 11.
RSI is often confused with central bank independence (CBI), though as stressed in the literature (see Lastra 1996; Taylor and Fleming 1999; Quintyn and Taylor 2002), the two are conceptually distinct and need not necessarily coexist even when the regulation and supervision functions and the monetary policy functions are vested in the same authority.
- 12.
- 13.
- 14.
- 15.
In the words of a very famous US central banker “it is just as important for a central bank to be independent of markets as it is to be independent of politics” (see Blinder 1997).
- 16.
As a matter of fact, if this were the sole purpose, it could be easily accommodated by calling in such representatives as observers or witnesses and recording their testimonies.
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Nachane, D.M. (2018). By Way of Conclusion: Selected Issues in Designing a New Architecture for the Indian Financial Sector. In: Critique of the New Consensus Macroeconomics and Implications for India. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3920-8_16
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