Rift over Budget proposals: Finance Ministry, RBI not on same page over debt management

NEW DELHI: Two weeks after Finance Minister Arun Jaitley announced the setting up of a monetary policy committee (MPC), tasked with fixing interest rates as well as switching oversight of the government bond market from Reserve Bank of India ( RBI) to the market regulator, the central bank and the finance ministry remain at odds over the two proposals.

In his budget speech on February 28, Jaitley announced RBI and the finance ministry had agreed to a monetary policy framework including a inflation target of 4% with a band of 2% on either side. But no details on the composition of a monetary policy committee were announced due to lack of consensus. Consensus continues to remain elusive, two people familiar with the matter told ET.

Surprise over Reserve Bank of India opposition

The five-member MPC will have three representatives from the central bank, including the governor. The bone of contention is over the appointment of the other two members as RBI governor Raghuram Rajan wants to head the panel that would appoint them, something which may not be acceptable to the government, said one of the people cited.

Further, Rajan had sought cabinet minister rank for the governor and a fixed five-year term. The proposal to shift regulation of government securities to Sebi, which regulates other financial instruments, is also facing opposition from RBI. Further, the central bank also has reservations over a related budget proposal, establishing an independent public debt management office ( PDMA).

Both the persons ET spoke to expressed surprise over the RBI’s stance, claiming that both the PDMA and shifting out the issuance of government securities and their oversight had been discussed with the central bank. “There are some clauses in the Finance Bill referring to this. But the finance minister’s speech did not contain any reference to this (switching regulation of government bonds to Sebi); the speech generally flags the important actions of the government.


I am not worried this will happen,” Rajan had said in a conference call shortly after the budget. Both the persons ET spoke to expressed surprise over the RBI’s stance, claiming that shifting out the issuance of government securities and their oversight had been discussed with the central bank as both are integral to an independent PDMA.

The RBI spokeswoman clarified the central bank was not opposed to PDMA per se. “RBI is not opposed to setting up of the PDMA, though it has views on when might be the right time to notify the legislation and the details of the set-up so as to utilise existing resources RBI has created efficiently,” she said. “We have no comment on the rest,” the spokeswoman said responding to questions on differences on the composition of the monetary policy committee. RBI governor Rajan met Jaitley on Wednesday evening where these issues may have been discussed.

The people cited above, who are familiar with the finance ministry’s thinking on the matter, say that establishing a PDMA is crucial to the development of the bond market. They expressed surprise over the RBI’s stance, claiming that both the PDMA and entrusting Sebi with oversight of the bond market had been discussed with the central bank. “One vital factor in promoting investment in India, including in the infrastructure sector, is the deepening of the Indian Bond market, which we have to bring at the same level as our world class equity market.

I intend to begin this process this year by setting up an independent Public Debt Management Agency (PDMA) which will bring both India’s external borrowings and domestic debt under one roof,” finance minister Arun Jaitley had said in his budget speech. In line with this announcement, the Finance Bill proposes an amendment to the RBI Act to bring regulation of government securities under market regulator Sebi, which also regulates corporate bonds.

Currently, the RBI is in charge of the issuance of public debt besides regulating the banks who have to compulsorily devote a certain proposition of their deposits to purchase government bonds under the Statutory Liquidity Ratio (SLR). The government is keen on development of a deep bond market in the country because of the large funding requirements of the infrastructure sector that banks would not be able to meet, said one of the people cited. The attempt is towards developing a world class financial market in line with the recommendations of key expert committees, including one chaired by Rajan himself before he became RBI governor, the person said.

“At present, the ‘investment banking’ function for the government is performed by the RBI. In the past decade, a series of expert committees have commented on the undesirability of burdening RBI with the task of selling bonds for the government. This involves a conflict of interest, since the government would benefit from lower interest rates, which the RBI has some control over. Investors in the bond market may also perceive the sale of bonds by RBI to be informed by a sense of how interest rates will evolve in the future. Finally, the RBI is the regulator of banks. Banking supervision could be distorted by the desire to sell bonds at an attractive price,” the committee headed by Rajan had said.