India needs to do additional work for having a comprehensive macroprudential policy framework with “clearer boundaries” for various authorities including RBI, while ensuring a balance between financial stability and inclusion, global body FSB said today.
While observing that “important steps” have been taken in recent years to develop the country’s macroprudential policy framework, FSB said the authorities also need to consider potential policy trade-offs in the future.
According to the Financial Stability Board (FSB), additional work is needed to flesh out and operationalise a comprehensive macroprudential policy framework.
“Much of this work relates to making macroprudential policy—setting more explicit, with clearer boundaries between authorities and with other policies, as well as in balancing the objectives of promoting financial development and inclusion,” its peer review report of India said.
FSB, which brings together entities from 24 countries and jurisdictions, works towards promoting effective regulatory, supervisory and other financial sector policies in the interest of financial stability.
India is represented by RBI, SEBI and the Finance Ministry at FSB.
The report said it would be useful for RBI’s systemic risk analysis to become more policy-oriented so that it can support decision-making for macroprudential purposes.
Having a standardised set of indicators for assessment of risks could also be used by the FSDC (Financial Stability and Development Council) to discuss systemic risks and policy responses.
While it is understandable that financial development and inclusion are key policy objectives, FSB said they could in principle occasionally come into conflict with maintaining financial stability.
“The authorities report that, in practice, there has been no conflict thus far and that they view a deeper financial system as contributing to increased financial stability... It is therefore important for the authorities — as they flesh out their macroprudential framework — to consider potential policy trade—offs in the future,” FSB said.
Citing IMF report released earlier this year, FSB said India experienced high credit growth of around 25 per cent per year between 2005-06 and 2010—11, but no aggregate countercyclical macroprudential measures, other than sector-specific tools for commercial real estate and residential housing loans were applied.