By and for the RBI

The RBI and the government jointly set up a committee to self-assess India’s financial system,rather than let external experts do it under the Financial Sector Assessment Programme. Its recommendations were announced by RBI Deputy Governor Rakesh Mohan,and they invite a simple question: why did the government and the RBI choose “self-assessment”? Instead of emphasising independent international assessment,as the world would like to see done for the US today,this step will strengthen arguments that countries do not need to subject themselves to the critical eyes of independent experts — government and central bank officials in each country can tell the world what a resilient and stable financial system they have. How will India defend its position of asking for a greater role for international bodies like the IMF and for international supervision and assessment after refusing to participate in the FSAP when it came to its own turn?

India’s decision on self-assessment goes against the spirit of the FSAP. The Financial Sector Assessment Programme is a joint IMF and World Bank exercise and aims to increase the effectiveness of efforts to promote the soundness of financial systems in member countries. Under this programme,external experts study the financial system of a country and write a “financial system stability assessment”. The FSAP process has been running for roughly a decade now. The FSSAs play an important role of providing an independent assessment of a country. In the present financial crisis this role is being emphasised by many countries,including India,at the G-20 forum — especially after the regulatory failures in the US. What is pertinent is that the report by the Rakesh Mohan Committee on Financial Sector Assessment is the result of an exercise the Indian government chose to undertake on its own,instead of agreeing to an assessment under the standard FSAP,as conducted by the IMF and World Bank for member countries. The self-assessment committee included top officials from the RBI and the finance ministry.

It is not clear why the RBI and the ministry did not agree to an FSAP,which more than two-thirds of IMF member countries have already done. Further,what is the signal India is giving by this decision? Would India support the position that countries like the US whose regulatory failures have put the global financial system at risk do the same? The US has often been accused of ignoring international supervision and assessment. Does India’s choice of self-assessment not suggest that we will be happy if other countries act likewise,rather than face critical assessment by international experts? Even now,to prevent the wrong message being sent out,the ministry of finance should invite the IMF-World Bank FSAP for a standard financial assessment for India.