Why FRDI Bill further dilutes RBI's powers

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Why FRDI Bill further dilutes RBI's powers

There has been a gradual dilution of the powers of the Reserve Bank of India (RBI) in the last decade.

There has been a gradual dilution of the powers of the Reserve Bank of India (RBI) in the last decade. Seven years ago, the government created a super regulator by way of establishment of the Financial Stability and Development Council (FSDC) at the government level to oversee the issues of systematic risk. This body is chaired by Finance Minister, and RBI Governor is just one of the members of the council comprising other regulators like insurance, pension, bankruptcy and securities. The power to bring financial stability is very much shared now amongst the multiple regulators.

A year ago, the RBI's power to fix interest rates with governor deciding the rates also moved to a monetary policy committee. The RBI Governor no longer enjoys a veto on setting interest rates. Moreover, there are only three RBI members, including governor, in the six-member committee that also constitutes three outside members. Not many years ago, the RBI Governor with a veto power had led to personality clashes or government interference. The market had seen how former RBI Governor D Subbarao and the former Finance Minister P Chidambaram had a public spat over interest rate direction. Frustrated by Subbarao's tight monetary policy, Chidambaram said he would walk alone to ensure the economic growth. Subbarao had responded: "Chidambaram will one day say 'Thank God RBI Exists'."

The latest Financial Resolution and Deposit Insurance (FRDI) Bill, which is yet to be passed in the Parliament, further dilutes the powers of the central bank on superseding banks boards, deciding merger and acquisitions, identifying weak banks and also systemically important financial institutions. The Bill provides for establishing a Resolution Corporation. Though the Resolution Corporation will be an independent authority, it will consult the regulators i.e the RBI for bank-related issues like weak banks or deciding on systemically important financial institutions. So the RBI's exclusive powers will again go to a new corporation having chairperson and members from the RBI, finance ministry, Sebi among others.

Experts, however, defend by saying the government is creating an institutional framework for dealing with interest rates or bankruptcy of financial institutions and insurance companies. "There has to be a framework in place. Globally too, monetary policy committees decide the interest rates. Similarly, global central banks are working on insolvency laws for banks and financial institutions," they say.