The government will soon form the Financial Stability and Development 
Council, or FSDC, after it managed to bring on board regulators in the financial sector by addressing their key concerns, especially those of the Reserve Bank of India.
At a meeting chaired by finance minister Pranab Mukherjee and attended by all the regulatory heads, it was decided that a sub-committee of the Council, which will have the mandate to look after financial stability and inter-regulatory coordination, would be headed by the RBI governor.
The central bank had objected to the initial proposal of the finance ministry to assign the task to the finance secretary. The securities market regulator, SEBI, too had told the government that the Council should restrict itself to issues relating to financial stability.
Regulators, which include the RBI, SEBI, the Insurance Regulatory and Development Authority , or IRDA, and the Pension Fund Regulatory and Development Authority of India, or PFRDA, endorsed the proposal to create the FSDC at meeting. “It was agreed that with a view to strengthen and institutionalise the mechanism for maintaining financial stability and development, the central government would set up the apex council,” said a finance ministry statement.
The government appears to have reworked the architecture of the proposed council to ensure that the central bank was on board without undue dilution of the agenda of the FSDC.
“So long as the FSDC acts as a coordinator it is all right, but at the same time they should ensure autonomy of individual regulators,” said C Rangarajan, former RBI governor and chairman, Prime Minister’s Economic Advisory Council .
The Reserve Bank of India governor-headed subcommittee would be the first stop for sorting out any conflict between the regulators, thus addressing concerns that the council could undermine the autonomy of regulators. All regulators will be represented on the sub-committee with senior finance ministry officials as members and the RBI governor as the chairman, similar to the structure of the existing High Level Coordination Committee on Financial Markets.
The FSDC will be constituted through an executive order soon. “It could be before Ravan goes up in flames (Dussehra) or Ram returns to Ayodhya (Deepawali),” said a finance ministry official.
“The FSDC seems to be headed to handle all the things that were originally intended for it,”said Ajay Shah, professor at National Institute of Public Finance and Policy, but added that the strength of FSDC depends much on the technical capabilities of its team.
The original consultation paper had proposed two sub-committees, one on stability, financial sector stability committee to be headed by finance secretary with all regulators as members and another one the financial sector regulatory coordination committee headed by RBI governor.
“Without prejudice to the autonomy of regulators, this Council would engage in macro-prudential supervision of the economy, including the functioning of large financial conglomerates and address inter-regulatory coordination issues,” the statement added.
Recently, RBI Governor D Subbarao had said that the central bank has a role greater than merely containing inflation, indicating that it too had a task of maintaining financial stability for which FSDC is being formed. But meeting seems to have satisfied the regulators.
The meeting, according to RBI governor D Subbarao, “was very constructive. We gave our suggestions. He (the Minister) said he will consider them and the finance ministry will respond.”
