FSDCs conversion into war room: Will government pass next weeks litmus test

Written by Arun S | Arup Roychoudhury | New Delhi | Updated: Jan 31 2014, 11:29am hrs
The adequacy of the governments recent efforts to strengthen the Financial Stability and Development Council (FSDC) as a war room to counter the 2008 financial crisis-like situations will be tested for the first time when the panel of regulators meets on February 4. This is because topping the agenda will be possible measures to help India withstand the impact of the ongoing emerging markets crisis, top finance ministry sources told FE.

These sources added that the discussions among regulators will be broadly around micro/macro-prudential regulations and strategies around the exchange rate. However, they added the FSDC's lack of comprehensive database and insufficient manpower of experts could hamper the efforts to bring out a foolproof strategy immediately.

The main job of FSDC is to discuss what happens in the global macro-economic scenario. The Fed's recent decision to cut its bond-buying programme by a further $10 billion will figure on top of the agenda, an official said on Thursday. We will also draw from what we did this time and how we can be relatively cushioned in future from any global economic shock, the person added.

The Fed said on Wednesday it would buy $65 billion in bonds per month starting February, down from $75 billion now. The announcement sent markets into a tizzy with the BSE Sensex plunging 300 points before recovering a little and the rupee going as low as 62.90 versus the dollar before closing at 62.56.

"Our current account deficit (CAD), foreign exchange reserves and domestic currency are at comfortable levels. There are also reports and opinion polls saying the next government (after the forthcoming general elections) would be reform-oriented and focused on growth. These factors are helping India positively as against the negative sentiments on other emerging markets such as Argentina, Turkey, Brazil and South Africa," a ministry official said, adding, however, that all those are no reasons to be complacent.

"Episodes like this (emerging markets crisis) are reminders that the FSDC needs to be strengthened to study the situation effectively and construct counter-factuals. FSDC doesn't have enough muscle now. What it needs is analytical firepower and not wild guesswork. There were many surprises following the 2008 global financial crisis and we have to be prepared for surprises this time too," said Ajay Shah, senior fellow at the think-tank National Institute of Public Finance and Policy (NIPFP).

Pointing out that FSDC is a body similar to the US Financial Stability Oversight Council (USFSOC), Shah said the government needs to set up a technical secretariat on the lines of the Office of Financial Research, which provides vital inputs to the USFSOC.

Earlier this month, finance minister P Chidambaram had said the government will strengthen the FSDC to enable it to be a war room during global economic shocks.

When outgoing Fed chairman Ben Bernanke first spoke of the tapering in June last year, it caused a massive bleeding of capital from emerging markets across the world. India was no exception as, by August, the rupee had touched a life-time low of 68.85 against the dollar and foreign capital all but fled the country.

This time though, India seems to have avoided the scale of sell-off happening in countries like Argentina, Brazil, South Africa and Turkey. A number of measures by the government and RBI have ensured that the forex reserves stay at a healthy level, foreign investors stay invested, and that a bloated current account deficit figure be brought under control.