“The RBI should formally have a single objective to stay close to a low inflation number or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate (repo and reverse repo), to achieve it,” said the Committee on Financial Sector Reforms (CFSR) which was set up by the Planning Commission.

The committee, headed by former IMF Chief Economist Raghuram Rajan, has said the apex bank should be willing to cut rates when inflation is expected to fall below the targeted level and should raise rates when inflation is expected to exceed the level to achieve growth and stability.

The committee has also made several proposals for financial sector reforms, which is feared to have slowed down in recent years. The country should allow more number of foreign equity investors to the corporate rupee-denominated bond market in order to channelise money in the fund-starved infrastructure sector, the panel said.
The Rajan Committee said that FSOA should comprise chiefs of regulatory bodies and should include Finance Secretary as a permanent invitee. “All issues of regulatory coordination and supervision of systemically important financial conglomerates and financial institutions will be taken up by the FOSS,” it added.

Insolvency of banks
CFSR also recommended strengthening of the Deposit Insurance and Credit Guarantee Corporation (DICGC) to monitor risk and resolve problems concerning insolvency of banks. Suggesting creation of unique national ID number with biometric identification, it said, the system could be used to build individual records payment and improve access to credit.

Pointing out that land is often pledged as collateral for securing bank loans, the committee said computerisation of land records and tenancy reform could help in removing ambiguity over land titles and increasing flow of credit to the farm sector.

In this regard, the it also underlined the need for setting up special courts to clear the backlog of land disputes, which takes years to get resolved.

The ambit of the Securitisation and Reconstruction of Financial assets and Enforcement of Security Interest Act (SRFAESI Act), CFSR said, needs to be extended to all institutions to help the lenders to recover the money.

While making a case for strengthening of the Asset Reconstruction Companies, it said the government should consider allowing foreign investment in ARCs. “There is really no sensible case to keep foreign direct investment out of ARCs,” it said.

The members high profile panel included SBI Chairman O P Bhatt, ICICI Bank Managing Director K V Kamath, Crisil Chief R Ravimohan, NCAER Director General Suman Bery and Kotak Mahindra Bank CEO Uday Kotak.