When the idea of the Financial Stability and Development Council (FSDC) was formulated, it appeared as if the finance ministry wanted to slowly take several of the functions of RBI. The backdrop was the feeling, in sections of the ministry, that RBI should just target inflation, that a UK-style
Financial Services Authority in charge of overall financial stability be tried out; this was the time when there were several publicised differences between the ministry and RBI on whether interest rates should be hiked; more recently, while the RBI has said it is worried about forex inflows, the finance ministry?s view is more sanguine. And when Sebi and Irda disagreed on Ulips, and the RBI-chaired High Level Coordination Committee (HLCC) wasn?t able to resolve this, the finance minister went ahead with a Bill in July to provide a joint mechanism to resolve inter-regulator differences, a Joint Committee that is to be headed by the minister.
Seen against this backdrop, yesterday?s decision that the FSDC would, while being chaired by the FM, have just one committee looking after both financial stability and inter-regulator coordination (to be chaired by the RBI Governor) seems a welcome move?in the earlier proposal, the financial stability committee was to be headed by the finance secretary while the RBI Governor was to head the inter-regulator committee. Had this happened, RBI Governor Subbarao had said, it would impinge on regulatory autonomy and flexibility. Had the financial stability committee taken a view different from the RBI Governor on forex inflows, for instance, it would have hamstrung the RBI while dealing with money supply and inflation.
Now that the FSDC will be a gentler form of itself, possibly modelled along the lines of the Prime Minister?s Economic Advisory Council, the question is whether things are better. As in all things, it?s a good idea to see how things work on the ground, but what?s not clear is how the HLCC and the proposed Joint Committee fit in with all this. A confusing souffle.