Responsive regulations for resilience

Regulations are never cast in stone, evolution is essential

- SWAMINATHAN J

While speaking ata recent conclave, the Reserve Bank of India governor emphasised that “no regulatory measure can be understood inisolation.Each measure hastobeseeninthe continuum of regulatory evolution and not in isolation”.

His remarks perhaps were prompted by the public commentary that followed a series of proposals announced by the RBI recently.

Many have welcomed these announcements; some have said it is “big, bold, courageous”. Others have cautioned that they may be “sowing the seeds of the next AQR [asset quality review]”. I believe both descriptions miss the point.

What is really happening is something subtler, but more important: India’s financial sector regulations are being calibrated to align with a banking system and an economy that lookvery different froma decadeago.

Regulations are written at a point in time. However, markets, technology, and risks keep evolving. If rules that were written for a stressed banking system in 2015 are applied unchanged to a much stronger system in 2025, it is not prudence. Instead, it may be termed as regulatory inertia. Therefore, the recent measures need to be seen in the larger context of regulatory evolution, and not as regulatory exuberance.

Since the constitution of the Regulations Review Authority 2.0 (RRA 2.0) in 2021, the RBI has been pruning redundantinstructionsin phases. RRA 2.0 recommendations have already led to the withdrawal of over 1,000 circulars, as well as rationalisation and streamlining of returns.

The latest consolidation drive goes further, folding approximately 3,500 directions, circulars, and guidelines, into about 244 consolidated Master Directions across 11 categories of regulated entities, while repealing redundant instructions.

Rationalisation of returns, withdrawal of redundant circulars, anda push towards consolidation, are all part ofasustained effort to make regulation responsive — stricter where it matters and simpler where it does not.