You are on page 1of 2

Raghuram Rajan's choice to head the Reserve Bank of India brings capable leadership to the central bank.

This is a good thing, but does not, in itself, change anything much in the short run. It cannot change the RBI's immediate monetary stance. Inflation caused by mismanagement of the country's foodgrain stocks is beyond monetary control. Low growth arising from missing investor confidence and elusive clearances cannot return because we have an expert in finance at the helm of the central bank. But, in the medium term, Raghuram Rajan can play a hugely constructive role in reforming financial sector regulation, financial innovation and inclusion and global policy alignment, an increasingly vital part of financial policy. Rajan chaired the committee that brought out a comprehensive and insightful report on financial sector reform in 2008. Some of its recommendations have been acted on. Others are yet to be taken up. At the helm of the premier regulator, Rajan can help coordinate effort to overhaul and streamline financial sector regulation. But, of course, only if the political system allows such reform. India has a huge informal financial sector, estimates of whose size are entirely woolly. It exists because the formal financial system excludes the majority of Indians, leading to segmented, highcost credit markets, unregulated financial intermediaries, scams, losses and tears. Universal access to formal finance is the first step to modernise India's financial sector. And the first step to such financial inclusion lies in increasing the number of banks and moving banking away from the ancient, brick and mortar model of branch-centric activity. Rajan enters the RBI at an interesting juncture. New bank licences are set to be issued, and the Unique Identity programme, Aadhaar has created nationwide infrastructure for electronic banking, which can easily be combined with mobile technologies and banking correspondents to effect a quantum leap in the reach of formal banking. The RBI has been dragging its feet on deploying new technologies. Rajan can help overcome this hurdle. The second major part is to reform financial regulation. Increasingly, it is clear that there has to be unified regulation of transactions, informed by macroprudential considerations. Having separate regulators for its-bitsy patches of the financial landscape either leaves the borders of these patches unregulated (the national spot exchange was unregulated) or converted into turf over which multiple regulators battle for control. Suppose we introduce exchange traded credit default swaps. These are essentially insurance products. But they relate to guarantee of repayment of bonds. And they are traded on stock exchanges. As things stand today, the insurance regulator, Sebi and the RBI can squabble over who should regulate credit derivative swaps. Have a unified regulator, and such problems would be solved. But we also need a macroprudential regulator with overarching powers, whose writ should inform the decisions of the transactions regulator. How precisely these arrangements should be wrought have to be painstakingly worked out. Having someone who understands the high-voltage world of finance at the helm of the RBI would help the government work out the appropriate arrangements. Globalising the governance of finance is another area that presents unprecedented challenges.

Finance has become increasingly global but its regulation has stayed national, leading to serious problems, which are being sought to be overcome under the aegis of the G20. India can and must play a constructive role in this process and Rajan's expertise and standing will be useful in this regard as well. The government has made the right choice and well in time, and deserves to be complimented for it. Now, don't rein him in, let Rajan take the lead and lend him the support he will surely need.