R Sonali Devi
Policy Update
Introduction:
The Government of India introduced the Financial Stability and Development Council (FSDC), an instrumental autonomous entity, to reinforce the financial structure of the nation. It was set up in December 2010 as a response to the recommendations of the Raghuram Rajan Committee (2008) and the need to enhance sectoral development, inter-regulatory collaboration and financial stability safeguards. The Council comprises key financial regulators, including the Chief Economic Adviser, the Governor of the Reserve Bank of India (RBI), and the directors of SEBI, IRDAI, and PFRDA, among others. It is chaired by the Union Finance Minister.
FSDC plays an important role in managing financial inclusion, financial literacy, macroprudential supervision, and the regulation of major financial institutions. The RBI Governor also serves as the chair of the Council’s Sub-Committee, which discusses critical issues about economic stability and sustained financial growth, although no proper budget has been allocated for its operations. The High-Level Coordination Committee on Financial Markets (HLCCFM), which had previously made informal regulatory coordination simpler, has been replaced by the FSDC. FSDC continues influencing India’s financial stability and the economy through integrating financial monitoring into an organized framework.
Background:
India became a member of the Financial Stability Board (FSB) in April 2009, reinforcing its commitment to global financial stability. Until FSDC’s establishment, the HLCCFM, which was formed 1992 through a letter from Dr. Montek Singh Ahluwalia to RBI Governor
S.Venkitaramanan was responsible for managing the financial sector. Although, in a financial sector that was evolving rapidly, HLCCFM was ineffective given that it was an unofficial institution lacking an official framework, a governing body with authority, and clear legal legitimacy.
The pressing need for a formal financial stability mechanism had previously been proposed by several government organizations, including:
- RBI’s Advisory Group on Securities Market Regulation (2001)
An Expert Committee on Making Mumbai an International Financial Centre (MIFC, 2007)
- Committee on Financial Sector Reforms (CFSR, 2008), led by Raghuram Rajan, which proposed a Financial Sector Oversight Agency (FSOA) for macroprudential supervision.
- Committee on Financial Sector Assessment (CFSA, 2009), which emphasized stress testing, risk monitoring, and inter-regulatory cooperation.
The CFSA Report suggested modifications that would grant the RBI more authority to monitor financial conglomerates and their affiliated corporations, indicating errors in India’s financial regulation, such as the lack of specific laws for them. The evaluation also highlighted the importance of establishing risk-based deposit insurance costs, upgrading India’s deposit insurance system (DICGC), and introducing immediate remedial measures for failing banks.
Structure of the Financial Stability and Development Council:
FSDC has a collection of specialized working groups that strengthen financial stability and regulatory coordination, along with its primary council and subcommittee:
- The Inter-Regulatory Technical Group (IR-TG), which was established in 2011, supports financial regulators by convening meetings every two to three months for discussions regarding systemic financial issues.
- Established in 2011, the Technical Group on Financial Inclusion and Financial Literacy (TGFIFL) consists of representatives from the finance ministry and various regulatory agencies who work on financial literacy and inclusion policies.
- To guarantee regulatory monitoring across sectors, the Inter-Regulatory Forum for Monitoring Financial Conglomerates (IRF-FC) was established in 2012 and holds responsibility for supervising key financial conglomerates.
- The Early Warning Group (EWG), which formed in 2012, integrates the responses of regulators and the government to financial crises by recognizing early indications of risk.
- Established in 2013, the Working Group on Resolution Regime for Financial Institutions reviews financial resolution frameworks, discovers deficiencies in regulation at the national level, and proposes improvements that are aligned with the FSB Key Principles.
- Financial regulators have been designated as special guests to the Macro Financial Monitoring Group (MFMG), which was set up in 2012 and tracks financial and macroeconomic threats. The group is chaired by the Chief Economic Adviser.
- The Crisis Prevention and Monitoring Framework (CPMF) has been in force since 2012 and assures regulatory cooperation across financial authorities, risk mitigation, and the avoidance of the likelihood of financial crises.
Functions of FSDC:
One of the fundamental responsibilities of the FSDC is to strengthen coordination among various financial regulatory bodies. The financial sector of the council is governed by several regulators, including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA). Maintaining a healthy financial environment demands that regulatory actions be comprehensible and systematic. Through fostering communication and cooperation between various organizations, the FSDC accelerates the enforcement of policies and prevents regulatory shortfalls or overlaps. The Council strengthens the overall framework of financial system governance through the promotion of inter-regulatory cooperation.
Recognizing that a robust and effective financial system is essential to prosperity, the FSDC is actively involved in the expansion of the financial sector. To be able to achieve this, the Council supports activities that enhance financial literacy and accessibility.
Increasing financial literacy promotes participation in the formal financial system by guaranteeing that both individuals and companies have the knowledge they need to make informed financial choices. The Council additionally supports better access to financial services, particularly for marginalized people. The FSDC facilitates the financial industry’s perpetual growth and expansion through establishing rules into place that encourage innovation and productivity in the sector.
A key responsibility of the FSDC is macroprudential monitoring, which includes keeping vigilant tabs on and reviewing systemic risks that might have an impact on the financial system. This includes examining market trends, new economic risks, and possible gaps in financial institutions. The Council ensures that adequate measures are in order to handle financial difficulties before they escalate into crises by employing a proactive approach. Maintaining credibility in the financial sector, preventing fluctuations in markets, and sustaining general economic stability all rely heavily on macroprudential supervision. By focusing on this field, the FSDC helps mitigate the risks associated with financial market volatility, recessions, and unforeseen events.
Performance of the Financial Stability and Development Council (FSDC):
- By boosting cooperation through financial regulators comprising the RBI, SEBI, IRDAI, and PFRDA, FSDC has minimized policy disputes and regulatory overlaps. It has rendered it simpler to respond effectively to evolving financial issues such as systemic threats, digital currencies, and fintech broadening.
- Setting priorities for financial inclusion and financial literacy, the council has introduced programs which include the Pradhan Mantri Mudra Yojana (PMMY) and the Pradhan Mantri Jan Dhan Yojana (PMJDY). These schemes have significantly improved marginalized communities’ ability to utilize financial services.
- The FSDC has played an integral part in producing thorough Financial Stability Reports, evaluating concerns about the fiscal health of the country, and facilitating the development of public policy.
- The council developed an Early Warning System to recognize and eliminate any threats to financial stability, reinforcing the financial sector’s ability to resist systemic threats.
- To ensure the uninterrupted operation of financial markets and the timely provision of essential financial services during the COVID-19 epidemic, the FSDC promoted cooperation among regulatory organizations, sustaining stability during a critical period in history.
Limitations of the Financial Stability and Development Council (FSDC):
- While the Financial Stability and Development Council (FSDC) serves an indispensable part in financial regulation, it is subject to a variety of limitations.
- The council has not received any official cooperation, therefore, its proposals are simply suggestions that are not legally binding. Various financial authorities continue to experience difficulties collaborating, which may result in inefficiencies in decision-making.
- The FSDC’s enforcement authority has constraints, which affect its ability to effectively tackle concerns associated with financial stability.
- The council is missing a systematic framework for addressing crises that are sector-specific instead, it emphasizes systemic challenges.
- The FSDC is required to further enhance its readiness to cope with emerging risks, including cyber threats and cryptocurrency guidelines, as fintech and digital finance are evolving at a rapid pace. In order to boost its efficacy, these constraints must be resolved.
Conclusion:
The Financial Stability and Development Council (FSDC) is essential for retaining administrative coherence and economic security in India. Its drawbacks, notably the absence of legal authority and enforcement authority, must be rectified regardless of how it has significantly enhanced financial control and crisis management. Its continued efficacy is contingent on enhancing inter-regulatory partnership, strengthening its purpose, and focusing on emergent financial challenges. The FSDC could enhance its financial stability while fostering sustainable economic growth by employing an innovative, data-driven, and multifaceted approach. A stronger, more competent, and adaptable FSDC will be vital for upholding stability and stimulating continued development as the financial sector in India advances.
References:
- The Economic Times. (2025, March 26). FSDC to assess financial reforms and launch central KYC registry. The Economic Times. https://economictimes.indiatimes.com/news/economy/policy/fsdc-to-assess-financial-reforms-and-launch-central-kyc-registry/articleshow/117841191.cms?from=mdr
- Department of Economic Affairs. (n.d.). Structure of Financial Stability and Development Council. Ministry of Finance, Government of India. https://dea.gov.in/sites/default/files/Structure%20of%20Financial%20Stability%20and%20Development%20Council_1_0.pdf
- Press Information Bureau. (2013, March 14). Financial Stability and Development Council (FSDC). Government of India. https://pib.gov.in/newsite/PrintRelease.aspx?relid=95543
- Press Information Bureau. (2025, March 26). Financial Stability and Development Council meeting highlights financial sector reforms. Government of India. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2007736
About the Contributor: R Sonali Devi is a Research Intern at IMPRI and pursuing her Postgraduate degree in Loyola College, Chennai.
Acknowledgement: The author expresses sincere gratitude to all those who provided guidance, with special thanks to Dr Arjun Kumar and Ma’am Aasthaba Jadeja.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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