Rajan, Subbarao to discuss ways to blunt taper impact with FM

Sebi, Irda, FMC chiefs to attend meeting; financial sector reforms may also be discussed

Reserve Bank of India (RBI) Governor Raghuram Rajan would rub shoulders with predecessor D Subbarao on Thursday at a high-level meeting here. The eighth meeting of the Financial Stability Development Council (FSDC), chaired by Finance Minister P Chidambaram, will discuss the likely impact of the US Federal Reserve’s tapering of quantitative easing on the markets, impact of the new companies law on the financial sector and the overall macroeconomic situation.

“Subbarao has also been called for the meeting,” a ministry official, who did not wish to be identified, told Business Standard. “It will be a kind of a farewell to him from the finance minister.”

This is the first time that the incumbent and former RBI governors are attending the FSDC meeting. The earlier FSDC meeting, in July, was also attended by Rajan and Subbarao, but that was in their capacities as the chief economic advisor and RBI governor, respectively.

Chiefs of the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority will also attend the deliberations. Forward Markets Commission Chairman Ramesh Abhishek has also been invited. His participation assumes importance because of the ongoing payment woes of the National Spot Exchange Ltd.

In the meeting, officials will discuss measures India can take to prevent dollar outflows when the Federal Reserve starts withdrawing its stimulus programme, which many think has been postponed at least till March next year. The Federal Open Market Committee (FOMC) is to  meet on October 29 and 30 and in December to take a call on the issue.

Implementation of the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC) could also be discussed, along with a review of decisions taken in the previous meeting.

FSLRC had suggested a unified regulator for the financial sector but FSDC was of the view that while major legal and institutional reforms would take time, action on other recommendations could be taken up separately in consultation with various stakeholders.

Officials said tapering of the stimulus had to happen and investors have already factored that in. Moreover, after Janet Yellen took over as Federal Reserve Chairperson, fears of tapering have receded. But the ministry wants to be prepared for any adverse reaction from investors, which could jeopardise its plans to contain the current account deficit.

In its seventh meeting in June, FSDC had reviewed the position of asset quality and capital adequacy of the banking system in the country. It was felt that despite concerns about some deterioration in asset quality, the strong capital adequacy of banks would enable the banking system to withstand stress.

FSDC was set up in 2010 to address inter-regulatory coordination issues, besides strengthening and institutionalising the mechanism for maintaining financial stability.

The sub-committee of FSDC is headed by the RBI Governor. In the August meeting, it reviewed potential risks to the stability of the domestic financial system. The sub-committee expressed concern on the deteriorating asset quality of public sector banks and discussed corrective measures in this regard.