Draft IFC falls short of addressing concerns, says RBI's Khan

Any exercise to reshape the legislative architecture of financial sector should evolve organically, starting with an reassessment of where the current system has failed, he said

The Reserve Bank of India (RBI) has said while attempting to define the financial regulator’s responsibilities, the revised draft Indian Financial Code (IFC) leaves various issues unaddressed.

“The policymakers are expected to carry out this responsibility within a broad set of principles and an understanding shaped by various adaptive learning processes. It is difficult to codify this into a set of simple rules/laws. The draft Indian Financial Code, though an ambitious attempt in this direction, leaves large gaps unaddressed,” RBI Deputy Governor H R Khan said at the 16th FIMMDA-PDAI annual conference at Prague on August 17.

“Any exercise to reshape the legislative architecture of the financial sector should evolve organically, starting with an objective reassessment of where the current system has failed. This is particularly important when many open-ended policy issues are being debated internationally,” he said.

In the last week of July, the government had placed the revised draft of the IFC in the public domain for comment. The draft proposed taking away the RBI governor’s veto power on interest rate decisions by the central bank’s monetary policy committee. It also proposed the committee would have four representatives from the government and three from the central bank, including the “RBI chairperson”.

Subsequently, the government struck a conciliatory note towards the central bank, saying it had no intention of curbing the RBI governor’s powers on deciding interest rates.

H R Khan said globally, there had been a comprehensive reassessment of the approaches to financial regulation, marked by a clear shift in the preferred models. “Fortunately, India is not faced with severe system failures, the key trigger for other countries to overhaul their frameworks. There is, therefore, no reason for a hasty, radical revamping. It must be kept in mind that from a public-policy perspective, the risk of getting systemic costs and benefits wrong can be very serious, as has been borne out by the experience of many Asian and Latin American economies in the past few decades.

“The lessons of the last crisis are being crystallised and addressed through the work of various international bodies such as the Financial Stability Board, of which India is a prominent member. Significant changes can be and are being brought about through this process towards achievement of the same objectives…The way forward should necessarily emerge out of a broad policy agreement and shared commitment among various stakeholders, including the government, the regulators and market participants about the direction and outcomes of the process. There should be a healthy, informed and robust debate on the specific issues,” he said.