## Monday, August 28, 2006

### The Naina Lal Kidwai problem

Andy Mukherjee wrote about this, and A. V. Rajwade has an article in Business Standard linking up the recent episode of RBI & Naina Lal Kidwai to the larger theme of rules-based regulation versus principles-based regulation. I have previously made the analogy of this debate as being akin to the choice between common law and civil law. The principles-based approach, or the common law approach, seems to be extremely desirable in finance: but this comes at the price of placing greater discretion in the hands of government employees. This requires changing the HR process of government (hiring, firing, performance evaluation, salaries) and in having immense transparency, public scrutiny and accountability bearing upon financial regulators. I think the UK has got this right: the Bank of England has been tied down by having accountability for meeting an inflation target, and the FSA is tied down by (a) having an outward oriented financial sector and (b) recourse for the financial industry to the treasury for disputes with the FSA.

Rajwade also notices how RBI is in no position to talk about conflicts of interest, given the conflicts of interest that are at its core. Ila Patnaik had written about this a few days ago.

Please note: LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.