The Reserve Bank of India (RBI) Governor, D. Subbarao, on Thursday said that though the central bank was retooling itself to safeguard financial stability, it would continue with the financial sector reforms.

“There is a concern in some quarters that the crisis may have dented our enthusiasm for financial sector reforms. I believe that concern is misplaced. We will not slow down on reforms, but will surely rework the road map to reflect the lessons of the crisis,” said Dr. Subbarao, at the FICCI-IBA annual conference on ‘Global Banking: Paradigm Shift’.

He indicated that the Reserve Bank was retooling itself to safeguard financial stability. “The Reserve Bank is conscious of the need to pay increasing attention to financial stability and to improve our skills in this area. As a beginning in this direction, we have set up a multi-disciplinary Financial Stability Unit in the Reserve Bank and are planning to put out a regular Financial Stability Report,” said Dr. Subbarao.

Dr. Subbarao highlighted five major challenges that the world, India included, need to be addressed on the way forward: How to define and measure financial stability; financial stability — exclusive or shared responsibility?; growth and financial stability — managing the trade-offs; reforming regulatory architecture; and fiscal policy, financial stability and central bank independence.

As the lessons of the financial crisis emerge, central banks are vigorously reinventing themselves and almost all countries are reviewing their regulatory architectures. “Two key lessons are driving this change: first that the responsibility for financial stability cannot be fragmented across several regulators; it has to rest unambiguously with a single regulator, and that single regulator optimally is the central bank. And second, that there is need for coordination across regulators on a regular basis and for developing a protocol for responding to a crisis situation,” said Dr. Subbarao. “There is a view that the High Level Coordination Committee on Financial Markets (HLCC-FM) comprising all the regulators and the Finance Secretary should be given a formal structure. While a formal structure will have the merit of enforcing accountability, the flip side is that it may make the forum excessively bureaucratic and detract from its other value adding features. “This is an issue that we must debate further.”

The second issue relating to regulatory architecture with relevance for financial stability has to do with changes, if any, warranted in the regulation of financial markets. Two recent reports, both influential, one by Percy Mistry on Mumbai as an International Financial Centre and the other by Raghuram Rajan on Financial Sector Reforms, have recommended that regulation of all trading of financial products and instruments be brought under SEBI. “We need to seriously debate the advisability of such a unification,” Dr. Subbarao added.

Fiscal consolidation

The RBI stressed the need for the Centre and the States return to the path of fiscal consolidation to preserve financial stability.

But, Dr. Subbarao said, “There are apprehensions that this may not happen soon because of the expected protracted recovery and also because of structural factors that may keep fiscal deficits at elevated levels into the medium-term”.

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