Reserve Bank Governor D Subbarao today said the Financial Stability and Development Council (FSDC) should act only as a coordinator between financial regulators for ensuring financial sector stability.
“There should be a coordination body such as the FSDC, but the coordination body should be just that — a coordination body which will have more importance during a crisis time — but in normal times, will be at a low level equilibrium,” the Governor said.
Subbarao also expressed reservations on the recommendations of the Financial Sector Legislative Reforms Commission, which calls for making the FSDC a statutory body to ensure financial stability and have a board headed by the Finance Minister to oversee the same.
Under the present FSDC arrangement, the RBI Governor is a chairman of a sub-committee as the overall head is the Finance Minister.
“In the Reserve Bank, we have some reservations about that sort of an arrangement. In particular, the concern is that the responsibility for financial stability can be given to a committee rather than to an institution,” Subbarao told a banking summit organised by IMC here.
The FSLRC was headed by retired Supreme Court judge BN Srikrishna and submitted his report in March.
The report called for a total overhaul of the existing financial system by merging the oversight functions of market, commodity, insurance and pension regulators.
“By the year 2020-25, we hope to achieve $13-14 trillion economy. An ambition cannot be achieved unless there are steps taken towards it. Therefore, you need something that is drastic, something that is total overhaul of the existing financial system,” Srikrishna had said in his report.
“Regulators like RBI are to aide the government in administering and governing...No single central bank in the world can say, I am autonomous, therefore, I will decide what I will do,” the report said.
The commission had also recommended the creation of a Monetary Policy Committee that would determine the policy interest rate, apart from creating a Unified Financial Authority (UFA) that would subsume functions of key agencies such as the SEBI, the IRDA, the PFRDA and the Forward Markets Commission.
Going further Subbarao said such an arrangement of having a board, is also contrary to the post-financial crisis practices being followed across the world, wherein such bodies only pursue the function of coordination and make recommendations.
Subbarao said the FSDC, formed in 2010, has been meeting at a regular basis but is handling matters of immediate concern only.
There is a need to define the role to be played by all the regulators and the Government vis-a-vis financial stability, he said, adding that FSDC’s role should only be limited to act as a coordinating agency.
“The responsibility for each of these institutions for financial stability should be clearly defined. There should be a coordination body such as the FSDC, but the coordination body should be just that — a coordination body which will have more importance during a crisis time but in normal time will be at a low level equilibrium,” he said.
He said even though the RBI does not have the explicit statutory mandate, the central bank has traditionally been performing the role of ensuring financial stability and that the central bank is placed at a “comparative advantage” to oversee it.
However, he clarified that the RBI is not seeking an exclusive role in ensuring financial stability.
“On financial stability, there are a number of issues that we need to think through within existing laws,” he said.
The issues on table include giving responsibility to a committee and if so, making sure that the committee does not “transgress” into the autonomy of the regulators.
One of the issues at hand on the aspect also involves “not compromising the synergy that we can get by housing both monetary policy responsibility and the responsibility for financial stability in one institution,” he said, without naming the RBI.