India needs a financial crisis agency to handle impact of Covid and future disasters

Reserve Bank of India (RBI) headquarter building in Mumbai | Photo: Dhiraj Singh | Bloomberg

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The fragmented nature of India’s financial sector often results in sidelining macro-economic considerations when it comes to formulating sectoral policies.

In the aftermath of the global financial crisis in 2008, the government of India undertook certain measures to promote financial stability and boost economic growth in the country. One such measure was the establishment of the Financial Stability and Development Council (FSDC) in 2010 under the Ministry of Finance. Its aim was to institutionalise and strengthen the mechanisms for maintaining financial stability and inter-regulatory coordination.

The Financial Stability and Development Council (FSDC) was undoubtedly the need of the hour, but the structural framework within which it operates has certain limitations. For instance, its non-statutory status hampers its functioning as an independent body responsible for assessing systemic risk, making recommendations and monitoring the financial system in a holistic manner.

Moreover, the FSDC currently operates in an opaque manner, and does not have a mandate to release information about its decisions or recommendations to the public. Therefore, the present structure of the FSDC is inadequate to deal with financial crises in a holistic and transparent manner.

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Building better institutions

The Covid-19 crisis and its unprecedented economic ramifications have not only brought to the fore the shortcomings of the FSDC, but have also demonstrated the need for creating a streamlined statutory system dedicated to a more formal and cohesive approach to financial crisis management in India. In order to create such a statutory system, a crisis management agency should be set up as a statutory body under the Ministry of Finance, and replace the FSDC. This agency should aim to rectify the inadequacies of extant structures, and be built on the foundational principles of accountability and transparency.

Broadly, the focus of such a crisis management agency should be twofold — macro-prudential and supervisory. Its functions should include developing periodic assessments of macro-economic risks, monitoring the functioning of the economy, international coordination, anticipating potential risks, and coordinating with concerned regulators in a balanced manner.

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