A govt agenda for RBI's success

RBI is saddled with conflicting functions. For it to succeed in its core task of monetary policy & regulation, resolving this is crucial

- K P KRISHNAN

Columnists like me are offering advice to the new governor of the Reserve Bank of India (RBI) on the important questions that he faces. However, a remarkable feature of the present situation is that, for the governor to succeed, the onus is on the Government of India (GoI).

Most central banks (CB) are narrowly focused on monetary policy. The RBI has a sprawling mandate. The trouble is these roles contain many inherent conflicts. The bulk of the RBI's difficulties arise from these conflicts. What are these roles?

1. RBI is the monetary authority, with its functions now controlled by the Monetary Policy Committee (MPC), where the governor and the RBI have a decisive, though not complete, say.

2. It is the regulator for banks and non-banking financial companies (NBFCs). It is also the owner of the deposit insurance entity, whose functions kick in when banks fail (which is partly caused by failures of banking regulation).

3. It is the regulator for payment settlements. It also has indirect control of a monopoly player (National Payments Corporation of India) in this space.

4. It is the financial stability regulator, whose function is formally shared with the GoI and other financial sector statutory regulatory authorities, but led by the RBI.

5. It is the government's treasury and debt manager, as well as the regulator of the government debt market. It is the biggest player in the government debt market and operates and owns the bulk of the market infrastructure institutions (MIIs).

6. It is the regulator of foreign currency flows and the biggest player in the foreign exchange market.

7. It is the frontline regulator and issuer of currency, even running its own currency press, while parliamentary legislation assigns most of the formal regulatory role of currency to the GoI.