Monday, April 05, 2010

RBI at age 75

I wrote a piece in the Financial Express today, looking back at the 75-year
old RBI
.

9 comments:

  1. Great article. These truths have been around but no person has had the courage to put it in honest, black and white terms. You deserve kudos for that.

    But the big problem is that there seems to be no conviction from ex RBI governors, who are now in position of immense power, to change anything. The speeches made last week bear it out.

    One interesting point is that RBI has been relatively corruption free and to some extent they derive moral strength from it. Thus when they opine people think it is without prejudice.

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  2. SEBI has overseen the greatest success in Indian finance -- the rise of a world class equity market. This is the only area where India appears in top 10 rankings in global finance. RBI has overseen the greatest failures of Indian finance -- the Bond-Currency-Derivatives Nexus and banking.

    The difference though not surprising, is so stark and succinct, it evoked a tiny laughter in me.

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  3. How about SEBI and the RBI being the Good cop-Bad cop of the Indian financial industry? Together they seem to have done far better than the SEC and the Fed. Anyway, I haven't read the article yet. I guess I am prejudiced but I'll read it.

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  4. Crticism on RBI about money manipulator is not convening me. Isn't it a part of their Open market committee?

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  5. There may or may not be legitimate reason for a government agency to trade in the currency market or in the bond market aiming to use market power to shake the price. But if this is to be standard operating procedure, then that very same agency should not be charged with regulatory and supervisory functions for that market. That's a conflict of interest.

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  6. Anonymous - why are you saying that it requires courage to say such things? I did not see anything particularly unusual about the article.

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  7. Criticizing RBI is not taken well by the RBI and others. We need to bring out the issues more openly into the public forum.

    Agree there is nothing new per se in the article, but it is critical that these issues are highlighted in mainstream press. I haven’t seen much writing bringing out the lacuna in the thinking of RBI.

    My view is that most commentators do not have the courage and conviction to do it. Therefore my post.

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  8. @ Mr. Shah.

    Your comment about SEBI's apparent success (world class equity market etcetera) and RBI's apparent failure(the bond-currency derivatives nexus etcetera) overstate the case against RBI.

    You eulogize SEBI without taking into account the Political Economy that shaped its creation and the Political Economy that is reflected in the way it functions.(makes rules etc) If you account for Political Economy/Public Choice most regulators appear similarly flawed, be it SEBI/RBI.

    In fact, Law & Society literature, (Armour/Lele)document how regulatory capture concerns are more in the system that SEBI operates than in a system that RBI operates. Granted,RBI's entrenched nature creates moral hazard in its ranks, but to compare it with SEBI and point to the latter as a sort of benchmark is a specious argument.

    Paradoxically enough, while you (rightly)criticize RBI for "playing in the market", you do not see that SEBI interferes in equal measure in the (implicit) market for investor-preferences.

    If you view that government agencies should not interfere in markets, through trading for example,that argument should be symmetrically applied to both regulators. Ergo, RBI should have been criticized on its own merits; not juxtaposing it with SEBI.

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  9. Totally misconceived on the role of a central bank. As a banker's bank, it has to trade in the money markets. It also has to "regulate" this market in terms of access to its discount window and controlling the balance sheet robustness of its borrowers, the banking system, else there will be a huge moral hazard problem. The RBI might be recalcitrant to change but it would be nice to hear a distinction between its particular role and that of central banks in general.

    Also, which agency is to bring about "reform"? The state, right? and how are we to make this reform accountable in the absence of your much-celebrated market discipline?

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