RBI Governor questions executive role for FSDC

Reserve Bank of India Governor D Subbarao has said any move to expand the powers of the finance minister-led Financial Stability

Reserve Bank of India Governor D Subbarao has said any move to expand the powers of the finance minister-led Financial Stability and Development Council FSDC the apex body of the financial sector regulators will clip the autonomy of the central bank.

We need to think through whether the responsibility of FSDC Board should be extended from being a coordination body to one having authority for executive decisions, the Governor said at a banking conference organised by the Indian Merchants Chamber on Wednesday.

Subbarao said he was reacting to comments made by finance minister P Chidambaram we should pursue the implementation of FSLRC suggestions within the framework of existing laws.

The Commission set up by the finance ministry in 2010 has recommended a modified role to RBI over only monetary issues and has also noted that FSDC should get a statutory status.

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 said,questioning proposals of the FSLRC.

The Governor bluntly pointed out that the government had held out a clear assurance in December 2010 when FSDC was set up that it would not erode the autonomy of the regulators. Can we clearly now define the boundaries between financial stability issues falling within the purview of the FSDC and regulatory issues falling exclusively within the domain of the regulators? Will this arrangement not mean compromising the synergy between monetary policy and policies for financial stability?

In recent months the differences between the finance ministry and the RBI on several issues has been open,including those on adjustments in interest rates. In October,2012 the finance minister had issued a statement after RBI did not cut rates that the government will walk alone.

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At present,the FSDC,which was set up in December 2010 consists of all financial sector regulators and is headed by the finance minister. However,since the RBI had raised concerns over its formation from the start,the RBI governor was made the chairman the sub-committee of the FSDC.

He,however,also assured that the RBI does not want an exclusive role of ensuring financial stability. While FSDC has been meeting regularly,about 3 or 4 times a year,Subbarao said it has focussed so far on stock taking and discussing policy issues: The agenda has been set more by immediate concerns,and there has been no explicit attempt to define what constitutes a financial stability issue that falls within the domain of the FSDC.