RESERVE BANK OF INDIA (PART - 10)

MAINTAINING FINANCIAL STABILITY

Pursuit of financial stability has emerged as a key critical policy objective for the central banks in the wake of the recent global financial crisis. Central banks have a critical role to play in achieving this objective. Though financial stability is not an explicit objective of the Reserve Bank in terms of the Reserve Bank of India Act, 1935, it has been an explicit objective of the Reserve Bank since the early 2000s.

In 2009, the Reserve Bank set up a dedicated Financial Stability Unit mainly to, put in place a system of continuous monitoring of the macro financial system. The department’s remit includes:

2  Conduct of macro-prudential surveillance of the financial system on an ongoing basis

2  Developing models for assessing financial stability in going forward

2  Preparation of half yearly financial stability reports.

2  Development of a database of key variables which could impact financial stability, in co-ordination with the supervisory wings of the Reserve Bank

2  Development of a time series of a core set of financial indicators

2  Conduct of systemic stress tests to assess resilience

Following the establishment of the Financial Stability Unit, the Reserve Bank started publishing periodic financial stability reports, with the first Financial Stability Report (FSR) being published in March 2010. FSRs are now being published on a half yearly basis in June and December every year. Internally, quarterly Systemic Risk Monitors and monthly Market Monitors are prepared to place before the Bank’s Top Management a more frequent assessment of the risks to systemic stability of the economy. In the Union Budget for 2010-11, the Finance Minister announced the establishment of Financial Stability and Development Council (FSDC) to provide, among other things, a high level focus to financial stability. The Reserve Bank plays a critical role in the Council. The Governor, Reserve Bank, is the ex-officio chairperson of the Sub Committee of the FSDC – the Council’s main operating arm. The Financial Stability Unit of the Reserve Bank of India acts as the Secretariat for the Sub Committee.

The Reserve Bank makes use of a variety of tools and techniques to assess the build up of systemic risks in the economy and to provide critical inputs in this respect to its policy making departments. The tools include:

v A Financial Stress Indicator - a contemporaneous indicator of conditions in financial markets and in the banking sector;

v Systemic Liquidity Indicator for assessing stresses in availability of systemic liquidity;

v A Fiscal Stress Indicator for assessing build up of risks from the fiscal;

v A Network Model of the bilateral exposures in the financial system – for assessing the interconnectedness in the system;

v A Banking Stability Indicator for assessing risk factors having a bearing on the stability of the banking sector; and

v A series of Banking Stability Measures for assessing the systemic importance of individual banks