For now it seems like much ado about nothing as Union finance minister Arun Jaitley decided to withdraw the clauses in the Finance Bill that proposed the setting up of a public debt management agency (PDMA), and the proposed amendment to the Reserve Bank of India Act that would have taken away RBI’s powers to manage the government’s debt as also government securities. The perceived friction between the government and the RBI over these two issues is over for now because Mr Jaitley said the government, in consultation with the RBI, would prepare a detailed road map that would finally lead to a unified financial market. It was discretion over valour as Mr Jaitley realised that instead of doing things unilaterally, it would be better to follow the consultative process. Besides, as Mr Jaitley said, the RBI has the domain knowledge for a PDMA and it would still require RBI executives to help set it up.
A PDMA was first mooted nearly two decades ago and everyone, including the RBI, supported it. It is done the world over so that the PDMA is at arm’s length from the government and the Central Bank. Of course, a lot will depend on how the PDMA is structured to be an independent agency in letter and spirit; this has been the RBI’s concern. The idea of a PDMA was mooted as it was felt that there was conflict of interest in the RBI managing the government’s debt. The RBI’s primary responsibility was to keep inflation low and the government’s heavy borrowing could lead to inflation, to put it very simply. And the government would like to borrow at the lowest rates.
However, when these proposals found their way into the Finance Bill of 2015-16, it created a fracas, probably because of the timing. The public perception, ill-conceived it seems, was that this was an extension of the friction between the finance minister and the RBI over the need to cut interest rates. There is no doubt that Mr Jaitley and his junior, Jayant Sinha, want interest rates cut, but they have never had a confrontation with the RBI governor, Dr Raghuram Rajan, over this issue, as did Dr Rajan’s predecessor, D. Subbarao, with then finance minister P. Chidambaram.
Even on managing the G-Sec markets, currently done by the RBI, the move to bring it under Sebi’s regulation seems sound since it is part of the bond market. The government has been thinking in terms of opening the government bond market to retail investors and it would help if it came under Sebi. The banks, in any case, are over-invested in G-Secs through the statutory liquidity ratio (SLR) requirements. Both the government and the RBI need to move in tandem and get these proposals going as part of the financial reform process.
