In recent news, the 22nd meeting of the Financial Stability and Development Council (FSDC) was held via video conference, chaired by the Finance Minister. The key topics discussed were market volatility, resource mobilisation, and capital flows in India amid the Covid-19 pandemic and nationwide lockdown.
About the Financial Stability and Development Council
The Financial Stability and Development Council (FSDC) is an apex non-statutory council under the Ministry of Finance, established by an Executive Order in 2010. The idea for the creation of FSDC was first proposed by the Raghuram Rajan committee in 2008 as part of financial sector reforms. The council is chaired by the Finance Minister, and its members include the heads of all Financial Sector Regulators including RBI, SEBI, PFRDA & IRDA, Finance Secretary, Secretary of Department of Economic Affairs (DEA), and others. In 2018, the council was reconstituted to include additional members such as the Minister of State responsible for DEA and the Chairperson of the Insolvency and Bankruptcy Board of India (IBBI).
Functions of FSDC
The primary goal of FSDC is to strengthen the system for maintaining financial stability and to promote inter-regulatory coordination and financial sector development. The council monitors macro-prudential supervision of the economy and assesses the functioning of large financial conglomerates.
Covid-19 and its Impact on Global Economy
The council has noted that the Covid-19 pandemic poses a significant threat to the stability of the world financial system, given the uncertainty of the crisis’s impact and the recovery timeline. The pandemic has thrust the global economy into its worst recession since the Great Depression of the 1930s.
Projected Domestic Economic Growth
Several estimations show that domestic economic growth for the financial year 2021 is expected to contract for the first time in forty years. Major financial bodies such as Crisil, Goldman Sachs, and Fitch Ratings have projected a contraction of 5% in the Indian economy during the current financial year.
The Council’s Measures and their Impact
The council has highlighted various short-term fiscal and monetary measures taken by the government and the Reserve Bank of India (RBI) to address the liquidity and capital needs of financial institutions during the global pandemic. The liquidity and solvency position of Non-Banking Financial Companies (NBFCs) were reviewed thoroughly due to the predicaments caused by moratoriums on loan payments and banks’ resistance to lending amid potential defaults.
Role of Government and Regulators
The council underscored the importance of both the government and regulators staying alert to financial conditions that may expose systemic vulnerabilities in the medium to long-term. The council affirmed that they would continue providing liquidity and capital support to domestic financial institutions in order to stabilize disturbed markets due to pandemic-induced volatility.
Way Forward
The council acknowledged that while the resilience of the financial system, fiscal support, regulatory flexibility, and announced liquidity provision have ensured support for economic recovery, a more prolonged slowdown may present new risks. Governments are advised to consider a range of policy tools, including efficient bankruptcy and restructuring systems, government guarantees for private investments, and other measures. Thus, the FSDC is expected to take further appropriate steps to strengthen the liquidity and capital base of domestic financial institutions, ensuring long-term stability in the financial sectors.
