Govt trying to usurp RBI’s financial market powers as well

Close on the heels of the agreement on inflation targeting forced on the Reserve Bank of India (See: RBI, govt in pact to bring inflation below 6% by January 2016), (RBI), finance minister Arun Jaitley also is bringing in changes to the Reserve Bank of India Act to take away its financial market regulatory roll as well.

The Union Budget presented by finance minister Arun Jaitley on 28 March had proposed the formation of a Public Debt Management Agency, ending the Reserve Bank of India's role as the government's merchant banker and curbing its powers over secondary market trading in government securities by handing it over to the Securities and Exchange Board of India (Sebi).

The Finance Bill that followed the Budget includes a new clause that seeks to amend Clause 45U and 45W of the Reserve Bank of India Act.

These clauses deal with RBI's powers to regulate the financial system of the country, determine the policy relating to interest rates or interest rate products and give directions to the securities and currency market.

''The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time,'' says Clause 45U 1.

These measures together with proposals to amend the Foreign Exchange Management Act will shift regulation-making power on equity-related capital flows to the government.

The creation of a Public Debt Management Agency, part of the move to implement recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice Srikrishna, will leave the RBI with nothing much to regulate and make it a mere rubber stamp of the finance ministry.

Most of the moves in the budget have been the subject of debate for many years. For instance, past committees had suggested Sebi overseeing secondary market trading in government bonds since it was the financial regulator. The shift of management of public debt to the government was made by RBI itself many years back on the grounds that there was a conflict of interest as RBI as the merchant banker would always seek to keep yields on G-secs low.

RBI governor Raghuram Rajan, however, did not seem much bothered.

"On the shifting of regulatory powers from RBI, there are indeed some clauses in the Finance Bill but the finance minister's speech did not contain any reference to this and FM's speech generally flags important acts of the government and I am not worried that this will happen," he said at a conference call with analysts on Wednesday.

On the proposal to divest RBI of debt management function, Rajan said: "The notion is that the PDMA will be independent and won't suffer from conflict of interest. I have said that these conflicts of interests are probably not the most important thing now. My sense is when it finally emerges, it will have a lot of RBI presence and support to avoid reinventing the wheel."

RBI, he said, will continue to play a role in regulating capital flows although the finance minister said it was a policy issue and would therefore come under the domain of the government.