Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011
Part B. Developmental and Regulatory Policies
III. Financial Stability
Financial Stability and Development Council and its Sub-Committee
74. The Financial Stability and Development Council (FSDC), set up in 2010, is assisted by a Sub-Committee, chaired by Governor, Reserve Bank, and its members include financial system regulators, the Finance Secretary and other key Ministry of Finance officials. In order to provide focused attention to the broad areas of functioning of the FSDC and its Sub-Committee, the Sub-Committee has set up two Technical Groups – a Technical Group on Financial Inclusion and Financial Literacy and an Inter-Regulatory Technical Group. The Technical Group on Financial Inclusion and Financial Literacy, headed by the Deputy Governor in charge of financial stability in the Reserve Bank, will include representatives from the regulators and from the ministries and associated departments of the Central and State Governments. The Inter-Regulatory Technical Group, chaired by the Executive Director in charge of the financial stability in the Reserve Bank, will include representatives from the four financial sector regulators, viz., the Reserve Bank, the SEBI, the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA) and will discuss issues relating to systemic financial stability risks and inter-regulatory co-ordination. Both Technical Groups will provide critical inputs to the Sub-Committee. The secretariat of the Sub-Committee (Financial Stability Unit at the Reserve Bank) will act as the secretariat for these two Groups.
Financial Stability Report
75. The first Financial Stability Report (FSR) was published by the Reserve Bank in March 2010. Subsequently, it was decided that the Reserve Bank would publish FSRs twice every year in June and December. The June 2011 FSR, which included contributions from the SEBI and the IRDA, reflected the deepening of inter-regulatory collaborative process for financial stability assessment and presented a more holistic position of risks and stress in the system. In order to further enhance the coverage of the FSR so that it adequately reflects the potential systemic risks facing the whole of the economy, it has been decided that beginning from the next FSR, the draft report will be discussed in a meeting of the Sub-Committee of the FSDC. The comments/suggestions of the members would be suitably incorporated in the Report before its final release. In addition to the half-yearly FSRs, an internal review of systemic risks facing the financial system is undertaken in the interim period through Systemic Risk Monitors. Financial Market Risk Monitors are also prepared on a monthly basis for internal surveillance of various markets. The tools and techniques used to assess the stability of the financial sector are being improved over time.
Assessment of Financial Stability
76. The June 2011 FSR observed that the Indian financial system remained stable in the face of some fragilities being observed in the global macro-financial environment. The macroeconomic fundamentals for India continued to be strong, notwithstanding the prevailing inflationary pressures and concerns on the fiscal front. The banking sector was resilient, though going forward stress tests pointed to the strains in profitability and asset quality. Under severe stress tests, banks might also face liquidity constraints.
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