Other than for articulating the monetary policy stance and the broad macroeconomic trends, the Reserve Bank of India's annual policy statement is noteworthy for its comprehensive stock-taking of development and regulatory issues, financial markets, and several other related areas. In effect, it has become a one-point source of reference for all current financial sector matters, both regulatory and developmental. In respect of a few of the issues, such as the licensing norms for new commercial banks, the RBI statement provides an amplification of what the Finance Minister announced in his budget speech. Others, such as a road map for foreign banks, are in the domain of the central bank and needed to be updated. On the financial markets and financial sector reform, the RBI's well-known, measured approach is again in evidence. The financial system will stand to benefit only incrementally from the new products that have been announced. Obviously, the lessons from the financial crisis will guide the central bank in its approach to financial sector reform and intermediation. There are a few measures to strengthen financial sector regulation on an ongoing basis and improve the efficiency of the banking sector, while maintaining financial stability.
The RBI, which is expected to play a pivotal role in the new Financial Stability and Development Council, released its first financial stability report in March. In a significant initiative that will ensure transparency in the cost and delivery of credit, the RBI has issued guidelines for banks to switch over to a new system of base rate calculation from July 1. It will no longer be possible for banks to dispense credit at below the benchmark rates, which will be calculated in a transparent manner. Several new financial products are to be introduced but only after they have been deliberated upon. Regulation norms for non-convertible debentures and the final guidelines relating to over-the-counter foreign exchange derivatives are expected to be announced by June. The decision to boost infrastructure finance by relaxing the holding norms of eligible bonds by banks is a continuation of the policy thrust in this critical area. In two areas of great common interest — the operation of foreign banks and issuance of new bank licences — the RBI is likely to proceed cautiously. The consensus among regulators is to encourage foreign banks to incorporate subsidiaries in the country rather than operate through branches. Given its potential for controversy, the RBI has decided to delegate the task of vetting applications for new bank licences to an outside body.