Keeping all existing powers of Reserve Bank of India (RBI) in tact, Finance Minister Arun Jaitley, on Thursday, withdrew the clauses from the Finance Bill 2015 and said the Government, in consultation with the central bank, will set up the proposed Public Debt Management Agency (PDMA) to regulate Government Securities (G-Sec).
Jaitley, however, said that he would prepare a roadmap to pursue a separate debt management agency later in line with the global practice. Buying peace with RBI, the Government dropped this plan for the time being to strip the RBI of powers to regulate Government bonds and give it to an independent agency. “Since the RBI has been handling public debt management, the Government in consultation with the RBI will prepare a detailed roadmap separating the debt management function and the market infrastructure from the RBI and having a unified financial market,” Jaitley said.
Eventually, the Government in consultation with the RBI will work out a scheme for a separate debt management agency in line with the global practice. “Having an independent debt management office is also the best international practice in countries like US and UK neither public debt is managed by central bank nor is regulation of G-Sec, Currency and Derivative with the RBI,” he said, adding that the continuation of RBI as a debt manager of the Government limits the liquidity and fragments the functioning of bond market.
In his first full year Budget, Jaitley had proposed to set up a PDMA and shift the regulation of Government bonds from RBI to market regulator Securities and Exchange Board of India (SEBI). The proposal generated lot of controversy, with the RBI raising concerns and questioning the timing of the move. “It is being decided to delete the PDMA provisions from the Finance Bill for this financial year,” Jaitley said.
While RBI Governor Raghuram Rajan had publicly not criticised the Government move, Deputy Governor SS Mundra had last month called for examination of all related issues before the new agency takes shape. “Concern was expressed I think, the RBI Governor had told about it that the timing (of issuance of G-Secs) and all related issues need to be examined. That’s the only thing. Ultimately, there are reflections, implications of both of these things on the monetary policy,” Mundra had said.
“This Government is committed to unifying the financial market both by making the G-Sec part of this market as well as creating a proper bond currency derivate market. There are six different provisions which we are omitting,” Jaitley said, while referring to the provisions in the Finance Bill for Public Debt Management Agency (PDMA) and regulation of Government bonds. “The existing structure also creates a conflict of interest as RBI has to perform the twin role of controlling inflation and keeping the cost of government borrowing low,” he said.
Jaitley added that it also perpetuates the conflict of interest with the RBI from being a regulator of Government securities and simultaneously being both a trader in G-Secs.As regards capital market regulator Sebi, he emphasised it neither owns a stock exchange or a depository nor does it trade in bonds. Another conflict of interest for the RBI is that it forces the banks to invest in Government securities through the instrument of Statutory liquidity Ratio (SlR).