Reversing move to cut RBI powers wise

Finance minister Arun Jaitley has done well to withdraw the proposal to take away from the Reserve Bank of India its powers to regulate the bond markets. The government has also put on hold another proposal to create a Public Debt Management Agency (PDMA). The proposal had been made as part of this year’s finance bill. There was impropriety in going in for such an important reform through the finance bill. If at all the government was for it, it had to be thoroughly debated in parliament and a statutory amendment was the best means for that. But it is not just the way of effecting the change that made the government’s move controversial. The intention of the government and the merit of the change which was sought to be made have also been questioned. There has been an impression that the government and the RBI, headed by Governor Raghuram Rajan, are not on the same page on some issues. Therefore, the government’s move was seen as an attempt to whittle down the RBI’s powers. It has wisely refrained from giving strength to that impression.

In the present scheme, one important responsibility of the RBI is to regulate bond markets by managing the auction and sale of government bonds. It regulates public borrowing in such a way that there is enough liquidity in the market for companies and individuals borrow. This is apart from its functions to manage the currency value through money market operations, and the need to keep inflation within limits. Though the country’s fiscal position has improved a lot in recent months, it still does not meet the norms prescribed for it. So, depriving the RBI of its powers to regulate the money market and the bond market may not be right at this time.

A separate PDMA is a desirable goal. The RBI had itself once proposed this. This had also been recommended by committees on financial reforms and by experts. There is also the need to improve the working of the bond market to international standards by reforming it. But giving the regulatory powers to the Securities and Exchange Board of India, as the government proposed, may not be the best idea now.  There is the need for more consultations on the matter among all the stakeholders. This is what the government has now indicated when it said it wants to prepare a road map after studying all implications of setting up an independent PDMA. It is best to go for it after the fiscal parameters stabilise and the RBI’s inflation control commitment shows results.