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| In addition, the committee on financial sector reforms headed by Raghuram Rajan, Professor at the Graduate School of Business, University of Chicago, has suggested a shift to a true auction method for securities besides seeking a reduction in the period between auction and listing.
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| It wants the Reserve Bank of India to adopt a hands-off approach in managing exchange rates and has suggested that the central bank shift to inflation targeting, using short-term rates to manage liquidity and changing interest rates when inflation goes above or below the objective.
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| It also said that capital flows will pose a problem in the coming years, more so on the outflows front. While opposing capital controls, the panel in its draft report has suggested a steady opening up of the rupee bond market, which may include larger play for foreign investors, something that Finance Minister P Chidamabaram hinted at recently.
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| A liberal approach on outflows includes allowing insurance companies and provident fund to invest abroad, including a diversification into foreign government securities has also been suggested but the panel said that the timing for such liberalisation initiatives is critical. For instance, it pointed out that the foreign investment limit in bonds should be raised when capital inflows in other areas are low.
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| For further improvement the financial markets, the 10-member committee said that all regulations related to trading, including those on government bonds, should be supervised by the Sebi. The move will strengthen the interconnected markets, improve liquidity and increase competition.
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Besides, it wants the regulators to accord faster approvals to new products and is against any bans -- other than action against manipulators -- to ensure that there is no investor uncertainty. The reference was in response to banning commodity futures trade in agricultural products in February last year when inflation was rising. Markets that are missing like exchange traded interest rate and exchange rate derivatives are also needed.
During its four years in office, due to political resistance, the UPA government has been unable to push through most of its financial sector reforms agenda including more voting rights to foreign investors in Indian banks, more foreign investment in insurance and pension sector liberalisation. Similarly, there has been virtually no movement on the recommendations of the expert panel on making Mumbai an International Financial Centre.
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Even the report acknowledges that saying, "Clearly, there is little urgency for reforms because India is not in a crisis. This is where the political leadership is of essence. Reforming in crisis is similar to driving with a gun to your head
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