Annual Policy Statement for the Year 2010-11- 20th April 2010
Part B. Development and Regulatory Policies
51. The global financial crisis has underscored the importance of pursuing financial sector policies in the broader context of financial stability and to serve the interests of the real economy. A major lesson is that no indicator or action is foolproof, which points to the need for continuous monitoring, regular review of processes, proactive oversight and pre-emptive actions. Thus, periodic assessment of regulatory comforts and effective supervision are critical elements for developing the financial sector on a sound footing.
52. Over the last several years, the Reserve Bank has undertaken wide-ranging financial sector reforms to improve financial intermediation and maintain financial stability. This process has now become more intensive with a focus on drawing appropriate lessons from the global financial crisis and putting in place a regulatory regime that is alert to possible build-up of financial imbalances. The focus of the Reserve Bank’s regulation will continue to be to improve the efficiency of the banking sector while maintaining financial stability. Simultaneously, it will vigorously pursue the financial inclusion agenda to make financial sector development more inclusive.
53. A synopsis of the action taken on the past policy announcements together with a list of fresh policy measures is set out below.
I. Financial Stability
Financial Stability Report
54. As announced in the Annual Policy Statement of April 2009, the Reserve Bank established a Financial Stability Unit in August 2009 for carrying out periodic stress testing and for preparing financial stability reports.
55. The first Financial Stability Report (FSR) was released on March 25, 2010. This Report is an attempt at institutionalising the focus on financial stability and making it an integral part of the policy framework. The first FSR makes an assessment of the strength of the financial sector, with particular focus on banks, and has raised some concerns, including rising inflation, high government borrowings and likely surge in capital flows, from the financial stability standpoint. The FSR observed that the banks remained well-capitalised with higher core capital and sustainable financial leverage. Further, stress tests for credit and market risk confirmed banks’ resilience to withstand high stress. The FSR also emphasised the need for evolving a stronger supervisory regime for systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI) and strengthening the monitoring and oversight framework for systemically important financial conglomerates. Overall risk to financial stability was found to be limited. However, the recent financial turmoil has clearly demonstrated that financial stability cannot be taken for granted, and that the maintenance of financial stability requires constant vigilance, especially during normal times to detect and mitigate any incipient signs of instability. Going forward, the Financial Stability Reports will be published half-yearly.
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