When the High-Level Coordination Committee on Financial Markets (HLCC) failed to resolve the dispute over who should regulate unit-linked insurance plans, it prepared the ground for its autonomy to be curbed. So, the responsibility for paving the way for the ordinance making the finance minister the formal arbiter of regulatory disputes and possibly of other regulatory matters as well, lies with the RBI, whose governor chairs the HLCC. That, however, is no justification for the smash-and-grab tactic employed the finance ministry to foist itself atop the country's regulatory institutions, through an ordinance. This ordinance has prompted the reticent RBI governor to go public with his opposition to it. Now, the market regulator Sebi has weighed in, as well, with his reservations on the ordinance. The point is not that the current finance minister is eager to dictate terms to the financial sector regulators. He might not be. But, in the name of resolving one dispute between Sebi and insurance regulator Irda, the government is changing the institutional structure of financial regulation, and converting itself into a superregulator. This is undesirable. In any case, such a drastic change should not be pushed through via an ordinance. Let the ordinance lapse, and the government hold wide consultations on the desirable regulatory structure for the financial sector before enacting a new framework.
Now, during the post-Lehman crisis, regulators worked, in country after country, hand-in-hand with governments to salvage financial institutions, putting aside concerns about regulatory autonomy. This was appropriate behaviour during a crisis. But it does not mean that, in normal times, regulatory autonomy should be treated as a quaint fancy on par with Santa Claus. We have argued in the past that what is appropriate for India at its current stage of development is to make the HLCC work. The RBI bundles within itself the functions of setting the monetary policy, keeping an eye on exchange rate volatility, managing the government's debt and regulating banks and other financial institutions. Such bundling allows knowledge of what is happening in the world of finance to inform the central bank's actions, qualifying it to serve as the prime macroprudential regulator, whose inputs should guide regulators who watch over how individual financial markets behave. Let the government stay away at an arm's length, trusting the HLCC to give due weight to its inputs.