Given RBI’s unhappiness with the provisions in the budget that sought to give Sebi regulatory powers over the GSec market as well as to carve out a separate public debt management agency (PDMA), it is just as well that finance minister Arun Jaitley has withdrawn the provisions for this year at least. Given the central bank’s importance in terms of both inflation control and keeping the rupee steady—apart from regulating banks—its views need to be taken seriously, but the issue goes beyond just that. The issue is whether it is possible to have a PDMA independent of RBI and the government, and whether getting Sebi to regulate GSecs would be a significant addition to the regulatory system. The idea of an independent PDMA is an old one, and stems from the belief that the current system breeds a conflict of interest. Indeed, even RBI Governor Raghuram Rajan has spoken of the need for an independent PDMA at different points in time. As an inflation-controller, the theory goes, RBI may need to hike interest rates but, in its role as the manager of the government’s debt, it has an interest in keeping rates low. While the idea of reducing conflict of interest is a sound one, it has to be kept in mind this is theoretical since there has been no real-life situation of RBI faltering in the face of such a conflict in the past.
More important, as long as the bulk of the market for GSecs is dominated by banks—and it is, since the government forces banks to park a certain proportion of their deposits in GSecs—RBI cannot be kept out of the picture as it is the regulator for banks. It is, of course, true that were Sebi to be the regulator and were GSecs to be exchange-traded, the markets for them would get a bit deeper and more transparent. But the bulk of the market will still comprise banks. So, a precursor for an independent PDMA is getting the government’s deficit in order so that the SLR regime can be altogether scrapped. Indeed, as long as the government is perennially short of money and has to sequester bank funds, even a non-RBI PDMA cannot be truly independent since, if banks were not forced to hold GSecs, it is likely someone in the government would have to lean on them to do so. And while there is something to be said for one single regulator being in charge of all financial markets, as long as RBI is responsible for the health of banks and the currency, its role cannot be diminished either. In other words, the path towards an independent PDMA and a Sebi-regulated GSecs market is a long and complicated one; it needs to be carefully thought out and orchestrated between the government, RBI and Sebi, not through one line in the explanatory memorandum that catches all the players by surprise. Hopefully, the finance ministry will keep this in mind next year.