The Reserve Bank of India has shown a red flag to the finance ministry on the proposed Financial Stability and Development Council.
In a letter written to the ministry last week, the central bank has said the proposed FSDC should not try to be a super regulator but rather confine itself to financial literacy and inclusion.
This is the second time in less than a month that RBI has objected to a government proposal. Last month, the central bank had opposed the Ordinance that, among other things, provided for the establishment of a committee to resolve regulatory disputes on hybrid financial products.
The latest letter was in response to a discussion paper from the finance ministry on FSDC. In this, RBI has also made a case for being designated the 'systemic regulator', a role it has already been performing.
Mint Road is of the opinion that the central bank, being the monetary policy authority and the lender of last resort in the country, ideally placed to perform that role.
It feels the responsibility for financial stability and macro-prudential regulation of the financial sector should 'vest explicitly' with RBI.
The government's proposal clearly impinges on regulatory autonomy and flexibility and would affect the ability of sectoral regulators to act in a timely manner, RBI has said.
The bank has cited four international practices -- the US Federal Reserve, Bank of England, European Central Bank and Bank of France -- who have the final say in their country/region over issues concerning financial stability.
RBI has also suggested that instead of the finance minister heading FSDC, it should operate through an empowered committee to be chaired by the RBI governor, with other regulators and the finance secretary as members.
The government's discussion paper suggested FSDC have two committees -- the one on regulatory coordination be chaired by the RBI governor and the other, on financial stability, be headed by the finance secretary.
RBI also says the proposal, in its present form, exceeds the remit of the council envisaged in the Budget.
"The proposed role focuses on a developmental agenda and carries with it the risk of dissipated focus on issues related to financial stability and systemic risk.
"This is also not in line with the role of similar councils/commissions for financial stability conceived internationally in countries where significant failure of micro and macro prudential supervision has been perceived," it said.
Less than a month ago, RBI had opposed the Ordinance which sought to establish a joint committee on regulatory disputes.
Following its opposition, the government was forced to make amendments to the proposal when the Bill to replace the Ordinance was introduced in the Parliament last week.
The FSDC discussion paper was circulated by the finance ministry in May end.
The government, which announced the move in the Budget, wanted comments from the regulators for banking, insurance, capital markets and pension before formalising its position.
RBI has cited the comments made by Finance Minister Pranab Mukherjee at the time of the Budget and at RBI's platinum jubilee function to conclude that the government's discussion paper was more ambitious than the minister's intention.
"The proposals in the discussion paper require the FSDC to involve itself with operational issues related to regulation, supervision and development, in short, to essentially function as a super regulator.
"This is neither in consonance with the spirit of the Budget announcement nor in line with the aforesaid opinion of the finance minister," the RBI letter said.
Criticising the government's comment on the high-level co-ordination committee on financial markets (HLCC-FM) as 'development lethargy', RBI argued those are examples of 'healthy differences' among regulators motivated by different sectoral considerations.
RBI went on to say that the discussion paper ignores the need to take cognizance of the different compulsions governing each sector in the Indian context.
It said it also cannot be the case that the proposed FSDC will not entertain honest differences of opinion.
"While the discussion paper has much to say about the 'development lethargy' demonstrated by the HLCC-FM on issues requiring inter-regulatory coordination, it fails to take due cognizance of the fact that the Indian approach to financial market development has been a carefully calibrated one," RBI said.
The way RBI has build up the case that the central banking authority should be responsible for financial stability seems to suggest that it wants ensure no loose ends for a counter argument for the supremacy of any other authority.