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RBI not for single market regulator
September, 11th 2009

The Reserve Bank of India has reservations about the unified market regulator approach recommended by the Raghuram Rajan Committee report on Financial Sector Reforms.

It wants the current silo approach to the regulation of financial markets to continue for preserving financial stability.

Exercise oversight

Unlike equity prices, interest rates and exchange rates are key macroeconomic variables with implications for monetary policy and overall macroeconomic stability. In addition, banks dominate the interest and exchange rate markets.

By also being the regulator of these markets, the RBI is in a position to exercise oversight of institutions, markets and products, to monitor market developments and maintain financial stability at the systemic level.

This is an arrangement that has stood the test of time and protected our financial stability even in the face of some severe onslaughts. This is an arrangement that we should not jettison lightly in quest of a unified market regulator, the RBI Governor, Dr D. Subbarao, said.

The Governor pointed out that the responsibility for financial stability cannot be fragmented across several regulators; it has to rest unambiguously with a single regulator, and that single regulator optimally is the central bank.

And second, there is need for coordination across regulators on a regular basis and for developing a protocol for responding to a crisis situation.

He also expressed concern about a proposal in the Raghuram Rajan Committee report about bringing all trading of financial products under the Securities and Exchange Board of India (SEBI).

Two recent reports, both influential, one by Percy Mistry on Mumbai as an International Financial Centre and the other by Raghuram Rajan on Financial Sector Reforms, have recommended that regulation of all trading of financial products and instruments be brought under SEBI. We need to seriously debate the advisability of such a unification, the Governor said at FICCI-IBA banking conference.

Currently, the RBI regulates banks, NBFCs, the money market, and the markets for government securities market, credit, foreign exchange market and derivatives.

Products traded on exchanges fall within the regulatory purview of SEBI.

Dr Subbarao said India would exit the expansionary monetary regime sooner than other countries as inflationary pressures are showing up. He, however, did not provide a timeline for exiting the accommodative regime.

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