Finmin, RBI should join hands on inflation

Last year’s Budget had two surprises for the Indian financial sector. First, finance minister Pranab Mukherjee’s announcement that the Reserve Bank of India (RBI) would soon issue licensing norms for new private firms in the banking space and, second, the formation of the Financial Stability and Development Council (FSDC). On both issues, I am told RBI was consulted only a few days ahead of the budget. And, on both, the Indian central bank had reservations. It had been talking about consolidation in the banking sector, and not entry of new companies, till Mukherjee said this in his budget speech in February 2010. Even though the stated objective of FSDC is to “strengthen and institutionalize the mechanism for maintaining financial stability” and it plans to monitor macro-prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues “without prejudice to the autonomy of regulators”, both RBI and the capital market regulator are distinctly unhappy and they see it as a dent on their autonomy. The first draft on FSDC, circulated by the ministry, evoked strong reactions from RBI. It was circulated just before the promulgation of an ordinance by the President of India that sought to resolve the face-off between the stock market and insurance regulators. The 18 June ordinance, the Securities and Insurance Laws (Amendment and Validation) Ordinance, 2010, which later became a law, empowers the finance ministry to resolve all future regulatory disputes, including those involving RBI. Faced with stiff resistance from RBI, the ministry made cosmetic changes in the structure of FSDC and the regulatory dispute resolving law, but it did not budge an inch from its resolve to push through these issues. One wishes that it shows same resolve to address other financial sector related issues, some of them are a decade old.  The biggest threat to growth is high inflation and it can be contained only when the finance ministry and RBI mount a joint offensive, through fiscal and monetary measures. Mukherjee can make a beginning, using the budget 2012 as a platform.