SBI Conclave September 2026: The Mind of a Regulator: A Practitioner’s Perspective

(Talk delivered by former SEBI WTM Ananth Narayan at the 13th SBI Conclave on 24th September 2026)

The Mind of a Regulator: A Practitioner’s Perspective

Chairman SBI, Managing Directors, SBI, and distinguished members of the financial services community: thank you to SBI for this opportunity. 

Congratulations to the banker to every Indian for institutionalizing this conclave: it is truly an event that the financial ecosystem looks forward to.

On the topic of “the mind of a regulator”, I have had the opportunity of looking at regulation from different angles: as a regulated market practitioner, an academic, an independent director, and as a regulator.

Of course, where you stand on regulation depends on where you sit. In my talk today, I want to cover two broad areas.

The first is about co-creating an ideal regulatory framework.

The second is about regulatory intervention in financial markets.

I. A good regulatory framework

Let me begin with the design of the ideal regulatory framework. Every regulator faces a basic dilemma.

If they regulate or supervise too lightly, bad things can happen - fraud, misselling, institutional failures and threats to financial stability. Let me call these Type I errors.

But in trying to address every Type I error, we can end up with onerous rules, discourage legitimate businesses, and stifle competition and innovation. These are Type II errors.

Ideal regulation is about minimizing both these errors. I suggest there are four ways to achieve this collectively.

First is consultation

Our regulators have already built strong frameworks for consultation.

Consultation papers explain the problem, provide context, set out alternatives and seek active feedback. In many cases, expert advisory committees deliberate them further. Proposals often improve through this intensive process.

But I would take this principle further. The Government needs to consult as well.

Differential taxation of savings and capital-market instruments, for example, can alter savings behavior, capital flows and market structure, with complicated second- and third-order consequences.

While some fiscal matters do require confidentiality, in general, policy is improved when objectives, alternatives and trade-offs are clearly discussed and understood before a decision is made, rather than only defended after the fact.

Second, responsibility is a two-way street

Industry cannot complain about excessive regulation while remaining silent about bad practices within its own ranks.

I saw this firsthand with some Alternative Investment Funds (AIFs).

SEBI discovered that several AIFs were designed to circumvent RBI’s NPA guidelines, foreign-exchange regulations, and other regulations. Parts of the industry knew of such practices. But the burden of finding and addressing them fell upon the regulator.

The inevitable outcome was distrust and more restrictive regulation by RBI and SEBI. Legitimate participants bore the cost.

Things improved when industry engaged constructively: not merely pointing out Type II errors of over-regulation but helping regulators address potential Type I errors of misuse of regulations. Industry taking the lead paved the way for more balanced regulations.

Bottom line for industry is if you see something, say something. You will know what is happening well before the regulator does. Industry associations should aspire to become trusted advisers to regulators, rather than just lobbyists for their members.

Take misselling in financial services. Surely, the industry has the greatest interest in ensuring that unsuitable products are not sold to customers. An institution such as the IBA should take the lead, suggest strong industry standards, monitor outcomes, and call out bad practices.

Regulation and enforcement are too important to be left to regulators alone.

Third, expertise among regulators matters

Modern financial ecosystems are extraordinarily specialized.

However intelligent and hardworking, one cannot develop deep expertise in specific areas as markets, banking and credit, technology, accounting, regulation and supervision just through three-year rotations.

Regulators need some domain specialists within their ranks. 

Career paths should allow at least some officers to spend 10 or 15 years developing genuine expertise in specific areas, including with some stints in industry itself.  Bringing in external practitioners periodically can also help. 

Of course, all of this can create conflicts of interest. But the answer is not to exclude expertise. 

We should instead ensure disclosure, recusal and management of conflicts transparently. Sunlight is the best disinfectant.

At senior levels as well, external regulatory appointments should bring domain expertise to the role, not try to acquire it after taking charge.

Why does regulatory expertise matter?

Consultation can be imperfect. Large institutions have lawyers, consultants, industry associations, media and social-media reach. They can make their case eloquently.

The small participant, new entrant, and ordinary investor or depositor may have no such voice.

A regulator therefore needs the expertise to understand interests, weigh arguments, consciously listen for the people who are not in the room, and think long term. 

This is about achieving the right balance, rather than winning popularity contests amongst the powerful. 

From personal experience, I would strongly recommend that industry folk should consider applying for short stints in regulatory and public policy roles. 

While this will likely mean a break from rewarding careers in the short run, the personal satisfaction and broader perspective one gains from such stints can be invaluable for the long-term.

Fourth, institutional checks and balances

Conflicts can arise within institutions too.

Our exchanges, clearing corporations and depositories are commercial organizations competing for business. But they also perform regulatory and supervisory functions over the intermediaries and products that bring them revenues.

That doesn't imply wrongdoing. But to enhance trust and credibility, there is merit in considering moving these regulatory functions into a separate non-commercial entity, akin to FINRA in the United States.

Likewise, as SEBI matures, it is reasonable to ask whether ex-officio government officials need to sit on its board and participate in regulatory decisions.

Autonomy is often debated in the context of central banks. For securities market regulators as well, given the sensitivity of regulatory, supervisory, and enforcement decisions, institutional credibility depends on actual and perceived independence. In addition, markets are complex and fast-moving, requiring specialist regulatory and domain expertise.

While regulatory heads are naturally appointed by government, mature securities regulators operate without direct executive involvement in every regulation.

And then there is the broader question: who regulates the regulator?

SEBI has the Securities Appellate tribunal (SAT).

I can assure you – firsthand - that regulators do not enjoy having their orders challenged or overturned.

But knowing that an independent appellate body will scrutinize your reasoning imposes discipline. It encourages careful investigation, proportionality, due process and speaking orders.

So, I leave one question with the audience: should RBI's enforcement decisions —outside of crucial areas such as monetary policy, currency policy and financial stability — also be subject to an expert appellate mechanism?

II. Regulatory intervention in markets

Let me now turn to intervention in markets.

I posit that the same Type I–Type II framework applies to interventions as well.

Consider recent events.

In FY26, RBI purchased ₹8.8 lakh crore of government bonds: about 2.5% of GDP, and nearly 85% of the central government's net borrowing program.

At the same time, our tax structure on fixed-income investments, across deposits and bonds, is relatively punitive.

So, we are simultaneously suppressing the market price of fixed income and taxing its returns.

The results should not surprise us.

Household financial savings have increasingly preferred equity and other assets over fixed income. India's equity markets have deepened enormously, which is welcome. But our fixed-income ecosystem remains relatively shallow.

This has wider consequences.

If domestic savings disproportionately chase equity, valuations there can become stretched. At high valuations, foreign equity capital naturally becomes more cautious.

Meanwhile, relatively low domestic fixed income returns, compressed interest-rate differentials, and domestic valuation concerns, can encourage capital to move abroad.

We can therefore find ourselves in the uncomfortable position where foreign capital is reluctant to come in on a net basis, while domestic capital wants to net go out.

That capital flow problem then becomes a currency market problem, requiring large currency-market interventions as well.

In trying to manage interest rate markets and currency markets, we could end with the need to manage capital flows as well. The heavy swap subsidies offered to attract FCNR deposits are an example.

In all, each heavy intervention can require still more intervention – a veritable whack-a-mole.

Is there a simpler path? Perhaps there is.

Let savers and borrowers determine interest rates more freely.

Reduce the tax disadvantage faced by fixed income, across deposits and bonds. 

That would allow yields to remain low while making post-tax returns more attractive.

The tax revenue foregone may be smaller than expected, because discretionary savings likely already avoid heavily taxed fixed-income products.

A deeper fixed-income market would allow a better balance between debt and equity. 

It could make all Indian assets more attractive to domestic and foreign investors. And more balanced capital flows should make management of the currency easier.

None of this means that markets are infallible.

There are times when regulators and governments must intervene – in fact, globally, interventions are on the rise; consider Japan and the United States. 

But all interventions require thoughtful, holistic deliberations, including around possible unintended consequences, and ways to address the root causes.

III. Finally, the real economy

On root causes, ultimately, financial markets cannot solve everything.

We need to increase manufacturing as a percentage of our value-add, even as we prepare for the world of AI and changing geopolitics. For this and for increasing gainful employment and FDI, we must make it easier to acquire land, build factories, enforce contracts and integrate into global supply chains.

All this can improve India's economy and external balance far more durably than financial-market interventions can.

The agreements with the UK, EFTA and EU represent important opportunities in this regard.

IV. Let me end where I began

Good regulation and effective intervention require stakeholders to talk to each other, rather than past each other. It is about:

- Preventing Type I errors without creating Type II errors,

- Building genuine regulatory expertise, including within industry

- Listening carefully, including to those whose voices are not heard,

- Managing conflicts transparently,

- Creating institutions that hold even regulators accountable,

- And having the confidence to allow markets to do what they exist to do: discover prices, allocate capital and signal where problems lie.

Sometimes the hardest decision for a regulator or policymaker is to regulate or intervene.

And sometimes, the harder decision is not to regulate or intervene.

Once again, thank you to SBI, and to all of you for your patience!