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.
