Though the proposal wasn’t mentioned in Finance Minister Arun Jaitley’s Budget speech, the Finance Bill proposes to amend sections 45U and 45W of the RBI Act, which effectively takes away the central bank’s powers to regulate government securities and other money market instruments.
The amendment to section 45W says, “Any direction issued by the Reserve Bank of India, in respect of security, under chapter III D of the Reserve Bank of India Act, shall stand repealed.”
Usha Thorat, former deputy governor of RBI, said, “Certain powers in relation to regulating money market instruments and products and derivatives based on these instruments were given to RBI in 2005-06 by amending the RBI Act and this happened after a lot of discussion. Now, with this amendment in the Finance Bill, all these provisions are proposed to be withdrawn. RBI was given responsibility for financial stability and the power to regulate forex and money markets was given to RBI to enable it to fulfill its mandate for financial stability.
“Before such sweeping changes are brought about through the Finance Bill, there has to be an understanding of the purpose for such changes and whether these are indeed in the interest of financial stability. It has to go through a lot of discussion and dialogue.”
If the proposed amendments go through, regulations relating to the issuance and investment of commercial papers, inter-bank repo or any other repo and reverse repo used as instruments to raise liquidity by keeping these as collateral as government securities will no longer be in RBI’s hands.
To be sure, these amendments are not an extension of the Public Debt Management Act, which essentially deals with primary issuance of government securities. After the proposal is enacted, public debt management will be under the purview of Public Debt Management Agency, not RBI.
Speaking to analysts on Wednesday, RBI Governor Raghuram Rajan had said the proposed amendments weren’t part of the finance minister’s Budget speech. Answering a question on the shifting of regulatory powers over debt markets from RBI, Rajan said he expected the proposed changes wouldn’t take place. “On the shifting of regulatory powers over debt markets from RBI, there are some clauses in the Finance Bill referring to this. But the finance minister’s speech did not contain any reference to this; the speech generally flags the important actions of the government. I am not worried this will happen,” Rajan had said.
The proposal to shift the power to regulate money market operations from RBI was made by the Financial Sector Legislative Reforms Commission. Though there were exhaustive discussions on most other proposals by the council, the proposal to shift money regulations from RBI wasn’t discussed.