Financial stability is the toughest task for autonomy-less central banker who gets torn between governmental priorities and regulatory overlap, making them look like the mythological Greek character Sisyphus who endlessly rolls up a boulder uphill, only to see it slide back. India had set up the Financial Stability and Development Council after recognising the need for stability, but it needs to establish conventions and practices to prevent its ‘spillover’ into monetary policies, said the Reserve Bank of India Governor Duvvuri Subbarao.

“The challenge for central banks is still bigger than Sisyphus to achieve financial stability,” said Subbarao. “They have to manage multiple boulders at the same time. Only if they succeed in that multi-Sisyphean effort, will they be able to preserve financial stability.”

Subbarao has once again batted for autonomy for central banks even as it is perceived that coordination between regulators and government is a must to preserve financial stability. “It is generally acknowledged that these coordination mechanisms, especially as between the government and the regulators, must function in ways that do not compromise the autonomy of the regulators,” the governor said on Friday, at the SAARCFINANCE Governors’ Symposium in Kerala.

It is clear that he is not ready to sacrifice RBI’s autonomy at any cost after the setting up of the Financial Stability and Development Council last December. He had to fight hard with the finance ministry and get an assurance that setting up of FSDC will not in any way erode the autonomy of the regulators.

To ensure RBI’s autonomy in a FSDC regime, Subbarao prescribed developing conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators. There was rift showed up when Union finance minister Pranab Mukherjee announced the plan to set up the FSDC to oversee all financial regulators to iron out differences between them.

The structure attempts to strike a balance between the government’s objective of ensuring financial stability to reduce the probability of a crisis and the operative arrangements involving the central bank and other regulators.

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June 2021