RBI should be careful on relaxing prudential regulations, says Rajan

RBI should be careful on relaxing prudential regulations, says Rajan

RBI should be careful on relaxing prudential regulations, says Rajan

Putting the onus on the government to subsidise activities of national importance, RBI Governor Raghuram Rajan said that the RBI has to be careful about relaxing prudential regulations in these cases as it may pose systemic risks.

“While the RBI is a liberaliser, we have to be careful not to relax prudential regulations simply because an entity or activity is deemed of national importance. Dispensation on prudential regulation is the wrong instrument to favour such activities. A nationally important activity such as infrastructure may be very risky,” Rajan said while speaking at the annual day address to Foreign Exchange Dealers Association of India in Mumbai.

To require lower provisions, or to allow higher leverage or ECBs against such activities, may increase systemic risk. In the long run, the activity may be damaged by the regulatory dispensation (too many infrastructure projects that do not have dollar earnings will be financed with dollar or yen loans and cannot repay) and stability may also be compromised. It is far better for the government to directly subsidise such activities if it deems them important than for the RBI to sacrifice systemic stability on the altar of national importance, Rajan added.

Rajan also vouched for a level playing field for all kinds of instruments. “Unlike the more tax-protected gold monetisation bonds, the CPI indexed inflation indexed bonds (IIBs) are not fully tax protected against inflation. Going forward, a level playing field on taxes is warranted for all instruments, so that instruments do not gain favour simply because they get better tax treatment,” Rajan said.

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