Central banks best positioned to maintain financial stability: Subbarao

The central bank is the single entity best positioned to ensure financial stability and manage a financial crisis, though other financial regulators and the Government have a role in maintaining financial stability, according to Dr Duvvuri Subbarao, Governor, Reserve Bank of India.

Speaking on the financial stability mandate of central banks at the SAARCFINANCE Governors' Symposium at Kumarakom, Kerala on Friday, Dr Subbarao said “While all financial sector regulators, and indeed the Government, have a role in maintaining financial stability, from an effectiveness and accountability perspective and for preventing as well as managing a crisis, it is imperative to enjoin the executive responsibility for financial stability to a single entity and the central bank is best positioned to be that single entity.”

Autonomy issue

Referring to the autonomy of central banks, the Governor said with central banks assuming increasing responsibility for financial stability, the autonomy question has acquired an additional dimension and greater urgency.

The fear is that a formalised mechanism for coordination between the Government and the central bank for financial stability will, over time, erode the autonomy of the central bank, Dr Subbarao pointed out.

However, stressing the importance of autonomy for central banks, he said that it frees the central bank from the pressure of responding to short-term developments, deviating from its inflation target and, thereby, compromising its medium term inflation goals.

“Even as the importance of central bank autonomy in monetary policy is now broadly accepted, there is a growing view that central bank decision making has to become transparent and that central bankers have to be more accountable for the outcomes of their decisions,” Dr Subbarao said.

Role for other regulators too

About the situation in India, Dr Subbarao said that even as the RBI has implicitly been the systemic regulator in India, financial stability cannot be its exclusive responsibility. Other financial sector regulators such as the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Funds Regulatory and Development Authority too have important responsibilities. “Beyond the regulators, the crisis has demonstrated the importance of the coordinating role the Government has to play, especially in crisis times,” the Governor said.

Regulatory architecture

In India, the Financial Stability and Development Council (FSDC) chaired by the Finance Minister and a sub-committee chaired by the RBI Governor jointly have the responsibility for financial stability.

While the sub-committee under RBI Governor is expected to evolve as a more active, hands-on body for financial stability in normal times, the FSDC would have a broad oversight and will assume central role in crisis times.

“Now that the regulatory architecture of the FSDC is in place, it is important for the Government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators,” Dr Subbarao said.

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