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Government officials say there is no proposal to curb the Reserve Bank of India’s powers over the money markets and the Finance Bill’s proposed amendments to the RBI Act will only take away the central bank’s powers to issue and regulate government securities.
Officials told Business Standard the decisions on repo rates, reverse repo rates, overnight and interbank lending rates will continue to be under the central bank’s ambit. The proposed amendments would only take away government securities’ depository responsibilities and government bond market regulations from RBI.
“The central bank will continue to decide on repo, reserve repo and other lending rates. If those responsibilities are taken away, how can the RBI fight inflation? There was never a proposal like this,” a senior government official said.
The controversy relates to the Bill seeking amendments to sections 45U and 45W of the RBI Act, taken to mean the central bank's ambit over the money market might be significantly diluted. The language of sections 156 and 157 of the Bill might be changed when it comes for discussion in Parliament after the recess, which means after April 20.
The Bill seeks to amend clause (e) of section 45U. The proposed amendment says the words ‘and, for the purposes of “repo” or “reverse repo” including corporate bonds and debentures’ shall be omitted. The amendment to section 45W seeks to insert a clause which reads, “Any direction issued by the Reserve Bank of India, in respect of security, under chapter III D of the Reserve Bank of India Act, shall stand repealed.”
If the proposed amendments go through, certain quarters believe regulations relating to the issuance and investment of commercial papers, inter-bank repo or any other repo and reverse repo used as instruments to raise liquidity by keeping these as collateral as government securities will no longer be in RBI’s hands.
These powers in relation to regulating money market instruments and products, and derivatives based on these instruments, were given to RBI in 2005-06 by amending the Act.
Officials said the primary responsibility of issuing government securities (G-secs) will be with the proposed Public Debt Management Agency, whose formation is at least 18 months away. As announced by Finance Minister Arun Jaitley, it will be responsible for domestic sovereign debt and external borrowing.
Regulating government bond markets, RBI’s responsibility till now, will shift to the Securities and Exchange Board of India (Sebi). Officials say even that will take time.
“Sebi doesn’t have the kind of expertise in G-sec markets the way it knows equity and corporate bond markets. It will have to prepare itself for being an overall bond market regulator,” another official said, adding Sebi won’t assume oversight of government debt markets for at least a year. “The amendments will be the first step. It is a long process. For 2015-16 at least, G-sec market regulation is likely to stay under RBI,” the person said.
The official quoted first said the only function relating to G-secs left with RBI would be to register these papers. “The registry function will stay with the central bank, while the depository and regulatory functions will be taken away. The finer details are still being worked on.”
