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Take it slow

Government does well to defer to RBI in setting out the road map for an independent public debt management agency.

By: Express News Service |
Updated: May 2, 2015 12:00:50 am

Finance Minister Arun Jaitley has done the right thing by withdrawing the Union budget proposal for setting up an independent agency for managing public debt and handing over the regulation of government bonds to the capital markets regulator, Sebi. The government hasn’t jettisoned the plan, but decided to prepare a detailed road map before putting in place the new arrangements that will essentially take away these functions from the RBI. In principle, the plan makes sense. As the institution tasked with the responsibility of controlling inflation, the RBI has reason to keep interest rates as high as necessary. On the other hand, as a merchant banker for the government, it has an interest in keeping the cost of borrowing as low as possible for the latter — conflicting with its primary inflation-targeting objective. The same goes for trading in government securities, which the RBI undertakes as part of its open market operations. This again clashes with its role as regulator of the government bond market, which ideally should be with Sebi, which has no trading interests.

While the government’s proposals are reasonable, the finance ministry had clearly not thought through the implications of hiving off a function the RBI had been carrying out for years. Also, as some lawmakers pointed out, there was need for debate and the creation of a new public debt management agency required separate legislation — it was too important to be simply incorporated in the Finance Bill. There were also concerns from the states on whether the new arrangement would further encroach on their borrowing powers. At the end of the day, it is important to take critical stakeholders, particularly the central bank, along. This applies even more so with financial-sector reforms, where a gradualist approach is seen to have paid off in the Indian context.

The same approach should now be extended to the setting up of a monetary policy committee, which would have a key role in the fixing of interest rates. Now that the RBI has been formally assigned inflation targets, it is only fair that it should also be given the room to act and use all the monetary tools available to fulfil its mandate. That would mean having a complete say in choosing who should be part of the said panel. The government should not seek to call the shots here. That will, in turn, also impart credibility to the proposals to divest the central bank of its existing functions of managing public debt and regulating the government bond market. In the months ahead, a smooth working relationship between the fiscal and monetary policy arms of the state is needed, without any one-upmanship.

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First published on: 02-05-2015 at 12:00:47 am
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