In a marked softening of its stance, the government on Thursday decided to defer plans to set up an independent debt management authority this year, allowing the central bank to continue with regulating government bonds.
“It has been decided to delete the Public Debt Management Agency (PDMA) provisions from the Finance Bill for this financial year,” said Finance Minister Arun Jaitley while initiating the discussion on the Finance Bill, 2015 in the Lok Sabha, adding that a roadmap for setting up the proposed agency would be finalised in consultation with the Reserve Bank of India (RBI).
“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,” he said.
The move has raised eyebrows given that Jaitley in the Union Budget 2015-16, which he presented in February, proposed to set up the PDMA under Chapter VII of the Finance Bill and also amend Sections 45U and 45W of the RBI Act. While the 45U amendment proposed to take away the RBI’s powers to regulate interbank repo and reverse repo rates, the 45W amendment would shift the regulation of g-secs and money market instruments to SEBI.
The plan was, however, not taken too well by the central bank. While RBI Governor Raghuram Rajan did not criticise the move, RBI Deputy Governor S S Mundra had expressed concern. “Concern was expressed… I think, the (RBI) Governor had said 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.”
But in an indication that a compromise had been reached between the finance ministry and the RBI, Minister of State for Finance Jayant Sinha had told Reuters earlier this week that the government would not take away the central bank’s powers to regulate government bonds.
However, Jaitley underlined his commitment to setting up the PDMA. “This government is committed to unifying the financial market both by making the government securities part of this market as well as creating a proper bond-currency derivative nexus,” he informed the house.
Referring to international best practices in countries like USA and UK that have an independent debt management office, Jaitley said RBI’s role as a public debt manager or a regulator of currency and other derivatives fragments the bond market and creates a conflict of interest between its role of controlling inflation and keeping interest rates low to reduce the cost of government borrowings.
Further, it “perpetuates the conflict of interest within the RBI from being a regulator of government securities and simultaneously being both a trader in government securities and owning both the exchange on which the orders from government securities are matched and depository for government securities,” he said, adding that it also forces banks to invest in government paper through the Statutory Liquidity Ratio.
The proposal of a separate management of government debt from RBI was first mooted by the RBI itself in annual report 2000-01. Since then, several independent committees have recommended the establishment of an independent Debt Management Agency, equidistant both from the government and the RBI.