Report of the Committee on Financial Sector Assessment (CFSA) 2009

REPORT FINDINGS

Transparency and Data Dissemination

India has made significant progress in enhancing transparency in monetary and financial policies, fiscal arena and data dissemination. There are some areas where further transparency and disclosure can be achieved.

Transparency in Monetary Policy

India is largely compliant with the IMF’s Code of Good Practices on Transparency in Monetary Policy. The roles, responsibilities and objectives of the Reserve Bank are well-defined. The Reserve Bank has explicit multiple objectives of monetary policy with changing relative emphasis. It also follows a multiple indicator approach, which has been reasonably effective. The present legislative framework provides enough room and manoeuvrability for the Reserve Bank to operate monetary policy in consonance with evolving needs and circumstances. The key element of the framework at present is the flexibility enjoyed by the Reserve Bank while going about its assigned task of maintaining the monetary stability of India. The main issues that have come out of the assessment of transparency in monetary policy pertain to the review of legislations with regard to the objectives of monetary policy, the issue of operational independence and accountability of the Reserve Bank and the separation of debt management from monetary management.

As far as the issue of operational independence of the central bank is concerned, the Reserve Bank enjoys independence vis-à-vis the executive arm of the state through conventions, agreements and MoUs in specific areas. The specification of procedures and reasons for the removal of the Governor/Deputy Governor as also for supersession of the Board could potentially lead to the loss of well-established de facto independence. Any modifications that might be required to strengthen monetary policy as also the regulatory framework might be carried out by necessary amendments to existing legislations as needed, which would not call for a fundamental review of legislations or an overhaul of the existing legal framework. The CFSA feels that an overhaul of legislation may not be appropriate at the current juncture.

Following the announcement in the Union Budget 2007-08, the Central Government is proceeding with the establishment of a Middle Office, as a prelude to setting up of a full-fledged Debt Management Office (DMO). While most members of the CFSA concurred with the proposal to set up a DMO, one member felt that the DMO should be an independent body. The Chairman, however, was personally of the view that the time is not ripe for the complete separation of debt management from the Reserve Bank at the current juncture.

Transparency in Financial Policies

The Reserve Bank, SEBI and IRDA are compliant with the relevant standards in transparency in financial policies. Any move to institutionalise the High Level Coordination Committee for Financial Markets (HLCCFM) could prove to be counter-productive as it could reduce flexibility in the formulation of financial policies; however, the present information-sharing mechanism could be improved.

Fiscal Transparency

The major area of concern arising out of the assessment of fiscal transparency is in the reporting of off-budget items, like oil bonds, and the need to have an additional augmented fiscal deficit measure to capture these items. Likewise, any move towards accrual-based accounting should also be attempted in a gradual manner.

Data Dissemination Standards

There has been significant improvement in the data dissemination practices of various agencies, namely, the Central Statistical Organisation, the Office of the Economic Adviser in the Ministry of Commerce and Industry and the Reserve Bank. There is an urgent need to strengthen the functioning and data dissemination practices of the CSO, which had weakened after data submission became a voluntary process. There is also a need to consolidate the process of compiling labour data and this should be done by a professional statistical organisation. As far as price indices are concerned, updating the weights and inclusion of new products in the basket of goods needs to be expedited.

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