IMF should improve financial oversight: D Subbarao

The International Monetary Fund (IMF) should bolster its oversight of the global financial system, so as to help reverse the ill effects of surges in capital flows to developing countries, D Subbarao, governor of the Reserve Bank of India (RBI), said while addressing the IMF-World Bank meeting today.

He referred to a policy note published by the IMF in February 2010 that had reversed its long held orthodoxy on capital controls, which was earlier taboo. The note had referred to certain "circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows".

Now that there is wide agreement that controls can be 'desirable and effective' in managing capital flows, the IMF and other international bodies must pursue research on studying the type of controls and the circumstances so that emerging economies have useful guidelines to inform policy formulation, he said.

While the IMF has done a remarkable job of managing the crisis response, drawing on the lessons of the crisis, the review of the mandate of the Fund is important for it to effectively refocus on areas such as macro-financial stability and the spillover impact of policies of systemically important countries, he said, adding that such a review should lead to significant improvements in the surveillance and lending tool kits of the Fund.

He also called for a separation of the surveillance and lending functions of the IMF.

The clear lines of distinction between the surveillance and lending functions have to be maintained to ensure that the Fund's more intense surveillance focuses not only on borrowers and potential borrowers but also on the creditor members.