A new era of financial oversight and regulation is here, says RBI Deputy Governor

The Reserve Bank of India ( RBI) is embarking on a significant transformation in its regulatory approach, according to the central bank's Deputy Governor M Rajeshwar Rao. The central bank is gradually moving towards principle and outcome-based regulations; this shift aims to provide greater operational flexibility to regulated entities (REs), allowing them to align their activities with their specific needs while still adhering to a robust regulatory framework, he said.

Rao made this observations during a recent address at the Department of Personnel and Training's Management Development Programme on Financial Market Regulations at the Indian Institute of Management Kozhikode.

Underlining the complexities regulators face when crafting regulations, Rao said that there is no universally perfect regulatory model. However, he suggested that principle and outcome-based frameworks tend to suit mature markets better, as they can adapt to the unique challenges presented by evolving financial landscapes.

Rao's comments underscore a fundamental shift in regulatory philosophy. He stressed that regulators must adopt a forward-looking approach to effectively address emerging risks and ensure the resilience of the financial system. To achieve this, he called for a proactive mindset that embraces innovation and utilises data and technology to enhance regulatory efficiency.

The deputy governor further emphasised the need for regulators to leverage technology not only to improve internal processes but also for supervisory functions. He advocated for regulatory horizon risk scanning and the need to stay updated with rapid technological advancements.

In an era defined by digital transformation, collaboration with domain experts is essential for regulators to keep pace with ongoing changes in the financial sector, he said.

Rao also touched upon the importance of refining regulations to facilitate compliance for REs. Simplifying regulations, enhancing clarity, and eliminating redundancies are crucial steps in this process. The RBI has already begun to incorporate examples and frequently asked questions into its regulatory documents to aid REs in understanding compliance requirements.

Consumer protection emerged as a key theme in Rao's speech. He pointed out that regulatory policies must consider the interests of consumers, who are pivotal stakeholders in the financial system. By empowering consumers and safeguarding their rights, regulators can foster a more equitable financial environment.

Striking a balance between stability and innovation is critical in regulatory policy, Rao noted. While it is essential to mitigate systemic risks and protect consumers, overregulation can stifle creativity and hinder competition. Conversely, a sole focus on innovation without adequate safeguards may lead to financial instability and a loss of public confidence in the system, he said.