Revised Code

I need to and have quite a bit to say on this. India’s Ministry of Finance has uploaded a revised version of the Indian Financial Code (IFC) that was brought out as part of the Financial Sector Legislative Reforms Commission (FSLRC) in 2013. It has many priorities. Get banks moving on credit and cleaning up their books. But, it manages to muddy the waters on monetary policy, RBI, etc. The media and the commentariat latch on to the sensational aspects of the code and its implications. Rather bad and sad.

There was an article by Vivek Dehijia and his co-author in MINT today. This is an excerpt from their article:

A basic tenet of modern theory and practice of central banking is that a system which is opaque and allows discretion will invariably deliver worse outcomes than a transparent and rule-governed system, which the MPC plus the inflation targeting regime will provide.

That is a huge leap of faith and hypothesis, not borne out by reality. Mantras such as transparent and rules-based monetary policy are touted without any serious application of mind as to their relevance for economic outcomes. What is good for financial markets and financial sector participants is not necessarily good for the real economy. In fact, in most countries, categorically, it has been the opposite.

In this regard, William White’s interviews given earlier in the year and available at and the Presidential address by Luigi Zingales at the American Financial Association in January this year are important READs.  You can find Zingales’ speech here. I have blogged on William White’s interview earlier.

The heart of the issue is that and not the turf battles between MoF and RBI which is trumped up by the media. These policies are being put in place not by the present government for the present governor. They will remain in place for more time to come. Hence, the issue is not about Dr. Rajan or Mr. Jaitley. We need to move away from that.

It is about what is good for the economy as opposed to what is good for financial markets and financial market participants. This article and many other comments conflate the two.

Finally, the revised draft IFC is not just about RBI and MPC. Many aspects of it are not necessarily in the interests of economic stability even if they are in the interests of the financial sector. Hence, the implications of the draft IFC need to be examined in their totality.

MINT has done an interesting thing. It has posted an article on all the articles written on FSLRC recommendations and on the IFC. Happy to note that two of my articles on the subject are cited as well.

My longish piece on the FSLRC recommendations is here. Will have more to say in the coming days. Need to study more chapters of the revised draft IFC. Have read only two of them – on RBI and on Capital Controls.


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