In a reversal of its earlier stand, the Reserve Bank of India (RBI) on Friday said financial stability cannot be its exclusive responsibility. The latest stance is in line with the government’s view that financial stability should be under its jurisdiction.
RBI Governor Duvvuri Subbarao, who had always argued that financial stability should be an exclusive domain of the central bank, on Friday changed his position and said, “Even as the Reserve Bank has implicitly been the systemic regulator in India, financial stability cannot be its exclusive responsibility.” He was addressing the SAARCFINANCE Governors’ Symposium at Kumarakom, Kerala.
The government had made its intention clear from the beginning by setting up the Financial Stability and Development Council (FSDC), headed by the finance minister. Ever since the proposal for setting up of the FSDC was mooted, the RBI governor has been expressing his reservation, on the ground that it can impinge on the central bank’s autonomy and flexibility.
| 12 FEBRUARY, 2010 - MUMBAI Post-crisis, there is a growing view that unless financial stability is explicitly included in the mandate of central banks, it is likely to fall through the cracks |
| 5 AUGUST 2010 - HYDERABAD Should financial stability be an explicit mandate of the central banks? Pre-crisis, as I said, there was no answer; post-crisis, the answer is mostly ‘yes’ |
| 10 JUNE 2011 - KUMARAKOM Even as RBI has implicitly been the systemic regulator in India, financial stability cannot be its exclusive responsibility. Other financial sector regulators such as Sebi, Irda, PFRDA 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 |
On August 5 last year, in a speech made in Hyderabad, Subbarao had said the answer to the question, should financial stability be an explicit mandate of the central banks, is “mostly yes”, in the aftermath of the global financial crisis.
However, Subbarao — whose three-year term will end on September — on Friday said the FSDC will play the central role in a crisis, and the sub-committee of the council headed by RBI governor will only be active during normal times.
“Beyond the regulators, the crisis has demonstrated the importance of the coordinating role the Government has to play, especially in crisis times,” he said.
The RBI governor acknowledged that formation of a sub-committee strikes a balance between the government's desire to head the Financial Stability and Development Council and the need for centrality of the RBI in matters of financial stability.
“In the Indian context, the proposed structure attempts to strike a balance between the government objective of ensuring financial stability to reduce the probability of crisis and the operative arrangements involving the central bank and other regulators,” he said.
The governor, who now thinks central banks should play a substantive role in maintaining financial stability but not the exclusive role, says prioritisation across multiple objectives will be a challenging task. He cites the example of the statutory liquidity ratio regime in India, which poses a growth-stability trade off dilemma for RBI. The SLR requirement, which mandates banks to maintain 24 per cent of the net demand and time liabilities as statutory liquidity ratio, entails lesser flow of funds to productive sectors, which can adversely impact investment and growth.
Mint Road sources said the change in the governor’s stance on this important issue is because of the government going ahead with its plans despite RBI reservations on several issues, like the Ulip ordinance, creation of separate DMO, etc. Sources said the Governor may have thought there was no point in staying in a state of perpetual conflict with the government.
