Reform, not overregulate

With reference to “Reform, do not rationalise” (May 7), the article argued very well that India’s complex foreign debt policy must be reformed instead of continuing with the command and control approach. The implicit view that all borrowings, domestic or foreign, should be treated equally is well reasoned. However, the conclusion that the Reserve Bank of India (RBI) should have a foreign debt policy framework that “addresses the potential market failures arising from unhedged currency debt” is misguided for multiple reasons.

First, the RBI’s legal mandate is to regulate the issue of bank notes, maintain monetary stability and operate currency and credit system to India’s advantage. While the third mandate could be stretched to cover a foreign debt policy framework, the RBI does not have any legal authority to address potential market failures arising out of foreign borrowings of Indians. Needless restrictions dilute India’s interest by discouraging foreign investments.

Second, the “systematic collapse of the sector” stipulated by the authors is needless fearmongering and does not justify regulation. If we go after regulating every potential market failure, we would fall back to failed policies that we are still trying to reform. Moreover, the authors’ definition of potential market failure is vague and likely used to suit their personal narrative. Finally, hedging of currency risk should completely be up to the borrower. The authors assume that the persons borrowing in foreign currency are not aware of the risks. It is not true. The RBI must work within its mandate and not act like a parent overseeing their children’s finances.

Sudhanshu Neema by email