Budget 2015: A public debt management agency may take up RBI's powers on debt matters

NEW DELHI: Marking a radical shift, the budget has put the government completely in charge of the country’s policy on capital flows, taking away the Reserve Bank's regulatory control over entry and exit of equity and quasi-equity flows and their pricing.

"Capital account controls is a policy, rather than a regulatory matter. I, therefore, propose to amend, through the Finance Bill, Section 6 of Fema to clearly provide that control on capital flows as equity will be exercised by the government, in consultation with the RBI," finance minister Arun Jaitley said in his budget speech on Saturday. This move could queer the pitch for liberalisation of the pricing regime governing exits for foreign equity investors proposed recently by the RBI.
The RBI announcement, made in its recent monetary policy, followed an earlier central bank proposal granting a discretionary approval allowing transfer of shares by a non-resident investor at a price higher than their fair valuation in view of contractual commitments of the Indian partner or shareholder in the Tata-Docomo case. The finance ministry is yet to take a call on the RBI's proposal, according to an official with the ministry.

At present, foreign investment is managed by three entities — the finance ministry, RBI and the department of industrial policy and promotion (see graphic). Asked about the move, minister of state for finance Jayant Sinha told ET that DIPP now takes decisions and RBI implements them. "So, we have just said that the decision which is de-facto happening at DIPP can happen de-jure here," he said.

DEBT MANAGEMENT

The government has also proposed to move debt management from RBI to a Public Debt Management Agency (PDMA) and establish a Monetary Policy Committee to decide on this as part of the new framework that will also set an inflation target. Sinha was asked whether there had been a transfer of powers from RBI.

"Factually, the answer is yes and I mean that in terms of the PDMA," he told ET in an interview. "Public debt management was being done by the RBI and that would now be done by PDMA. But it has not come to the ministry of finance. It will go to the PDMA that is going to be an independent agency. As far as monetary policy agreement is concerned, it is not transfer of power. It is essentially an agreement making explicit an inflation target and it was in fact recommended by the RBI itself in the Urijit Patel committee (report)," Sinha said.

The amendment to Fema will result in faster clearances, said experts. For example, foreign direct investment (FDI) policy changes carried out through the controversial Press Notes 2 and 3 of 2009 were notified under Fema only after more than three years as the central bank felt it had led to inadvertent opening up of sectors beyond the specified caps through indirect investments. The changes in Fema will now do away with this unnecessary uncertainty for foreign investors.