Rajan Warns Against Relaxing Prudential Norms for “National Importance”

Raghuram Rajan, the outgoing governor of the Reserve Bank of India, on Friday, warned against relaxing prudential regulations to promote an activity that is deemed to be of “national importance”.

In a speech at a closed-door event, Rajan said, “Dispensation on prudential regulation is the wrong instrument to favour such activities.” A copy of the speech was disseminated by the central bank.

Giving the example of infrastructure, Rajan said that though it is an important activity for the nation, it could prove to be very risky.

“To require lower provisions, or to allow higher leverage or ECBs (external commercial borrowing) against such activities, may increase systemic risk,” Rajan said. “In the long run, the activity may be damaged by the regulatory dispensation and stability may also be compromised.”

The governor concluded by saying that it was far better for the government to directly subsidise such activities if it deems them important “than for RBI to sacrifice systemic stability on the altar of national importance.”

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