Annual Policy Statement for the Year 2009-10- 21st April 2009
Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2009-10
83. The key objective of financial sector policies is to aid the process of economic growth consistent with price and financial stability. In this context, the Reserve Bank has been focusing on improving credit delivery, developing financial markets and promoting financial inclusion. Internationally, the financial intermediation process has got significantly affected by the ongoing financial crisis. Consequently, various international bodies and financial intermediaries have been contemplating changes in the financial regulatory architecture to restore normalcy in the functioning of global financial markets and strengthen financial stability. There is a great deal of thinking going on about the appropriate design of the regulatory framework that encourages credit flow while mitigating risks. Domestically, although there has been some slowdown in credit growth, particularly in the second half of 2008-09, the banking system remains inherently sound and the financial markets including inter-bank markets are functioning normally. Nevertheless, the unfolding of the global financial crisis underscores the need for further strengthening of regulation and supervision even as India remains outside the epicentre of the global crisis.
International Co-operation - Recent Initiatives
Several international initiatives have been taken in the recent period for formulating proposals for strengthening the financial system. The major initiatives in this regard include the following:
• Several reports have been released recently such as the Financial Stability Forum’s (now Financial Stability Board) Report on ‘Enhancing Market and Institutional Resilience’, the Geneva Report on ‘The Fundamental Principles of Financial Regulation’, Larosiere Report on ‘The High Level Group on Financial Supervision in the EU’ and the Turner Review on ‘Regulatory Response to the Global Banking Crisis’.
• The G-20 countries have also taken several initiatives. In the summit held in Washington in November 2008, the G-20 countries laid down an action plan and constituted four Working Groups, viz., (i) Enhancing Sound Regulation and Strengthening Transparency; (ii) Reinforcing International Co-operation and Promoting Integrity in Financial Markets; (iii) Reform of the IMF; and (iv) The World Bank and other Multilateral Development Banks (MDBs). The first group on Enhancing Sound Regulation and Strengthening Transparency was co-chaired by Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India along with Mr. Tiff Macklem of Canada. The status for India with regard to the recommendations of this group in set out in Annex II.
• The leaders of the G-20 again met in London on April 2, 2009 and laid down the ‘Global Plan for Recovery and Reform’.
• Drawing mainly from the recommendations of the group on Enhancing Sound Regulation and Strengthening Transparency, the G-20 also made a declaration for strengthening the financial system. The declaration agreed to make far reaching reforms in the areas of expanding the membership of international bodies, international co-operation, prudential regulations, scope of regulations, compensation, tax havens and non-co-operative jurisdictions, accounting standards and credit rating agencies.
• With a view to increasing international co-operation, the Financial Stability Forum (FSF), rechristened as Financial Stability Board (FSB), has been expanded to include more emerging market economies and its mandate has been broadened. India has been invited to join the FSB as a member. Alongside the current mandate of the FSF – to assess vulnerabilities affecting the financial system and identify and oversee action needed to address them – the FSB will advise on market developments and monitor best practices in meeting regulatory standards, among others.
• The Basel Committee on Banking Supervision (BCBS) has also been expanded and India has been invited to nominate a member to the Committee. Accordingly, Smt. Usha Thorat, Deputy Governor, Reserve Bank of India has been nominated as a member of the BCBS.
* A Group of 30 (G-30) released the report on ‘Financial Reform – A Framework for Financial Stability’ on January 15, 2009 to strengthen prudential regulations and supervision.
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