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Following changes in the Reserve Bank of India (RBI) Act, to come into effect once the Finance Bill is passed, the central bank will only be left with powers to regulate repurchase and reverse repurchase rates for money, commercial papers, and corporate bonds and debentures held by banks and other financial institutions. It is likely to lose all powers over central and state government securities, including regulating repo and reverse repo rates of these securities held by banks and financial institutions.
As reported in Business Standard earlier, it will also lose the power to issue and regulate government securities.
The primary responsibility of issuing government securities (G-secs) will be that of the proposed Public Debt Management Agency. Regulating government bond markets, RBI's responsibility so far, will shift to the Securities and Exchange Board of India (Sebi).
Essentially, the central bank will only be empowered to fight inflation and regulate banks.
After Finance Minister Arun Jaitley presented the 2015-16 Budget, there were apprehensions that the changes in the Finance Bill would take away RBI's powers to decide repo and reverse repo rates for all financial instruments. However, government officials have clarified the proposed changes in the RBI Act would only pertain to G-secs.
The Bill has two clauses that will amend sections 45U and 45W of the RBI Act. While section 45U deals with definitions of terms such as securities, money market instruments, derivatives, repo and reverse repo, section 45W deals with RBI's power to regulate such instruments and their key policy rates.
"The amendments in 45U will change the definition of 'securities' to include only G-secs and take away the ambit of deciding rates on such G-secs away from RBI," said a senior government official. "Currently corporate bonds and debentures are also included in 'securities', as defined in the RBI Act," the official added.
The definitions of money market instruments, derivatives, repo and reverse repo in 45U will be tweaked accordingly, to reflect RBI's limited powers.
Section 45W of the RBI Act says: "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 for these to all agencies or any of them dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of a like nature, as the bank may specify from time to time."
After the passage of the Finance Bill, the word 'securities' is likely be dropped from the section. Subsequently, 'securities' will only pertain to central and state government securities, officials say. The Bill also states any direction issued by RBI in respect of a security shall stand repealed.
Officials have clarified the changes in the RBI Act will be in force as soon as the Finance Bill is passed. In practice, however, the formation of the proposed Public Debt Management Agency is at least 18 months away, they say, adding shifting the regulation of G-secs from RBI to Sebi would take some time.
A senior government official said Parliament was likely to discuss the Finance Bill from Wednesday.
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A SEA CHANGE The primary responsibility of issuing G-Secs will be that of the proposed Public Debt Management Agency, while regulating govt bond markets will be Sebi's responsibility |
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Relevant sections: In section 45U, securities refers to those of the central government or a state government, and for the purposes of repo or reverse repo, include corporate bonds and debentures
Changes: Entire part on corporate bonds and debentures to be removed. Securities will only mean central and state govt securities Relevant sections: Money market instruments are defined as call or notice money, term money, repo, reverse repo, certificate of deposit, commercial issuance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as RBI may specify from time to time |
Changes: Definition will be changed to include the phrase 'which is not a security' after 'such other debt instrument'. Similar addition proposed in the definition of derivatives as well
Relevant sections: Repo is defined as an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price, including interest
Changes: The word securities, appearing in two places, is to be replaced by corporate bonds and debentures. Similar changes proposed in definition of reverse repo
Relevant sections: Section 45W says RBI may, in public interest, or to regulate the financial system of the country, determine the policy relating to interest and give directions regarding the same to all agencies dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature
Changes: The word securities will be omitted from the section. Besides, the Finance Bill says that any direction issued by RBI in respect of a security shall stand repealed
