Budget 2015: Jaitley’s proposals will cut down RBI powers, but give more teeth to Sebi

The Reserve Bank of India (RBI) is set to lose some of its power when some budget recommendations, such as moving the central bank’s debt management function to a separate agency, and creating a new monetary policy framework, come into force.

To be sure, there is no surprise element in either of these proposals. Both have been on the cards for a while now. But now the budget has made a commitment to initiate the process in 2015-2016. The new debt management agency will manage both domestic and external debt.

The core functions of the central bank will now mainly be power monetary policy and banking sector regulation.

The RBI has, in fact, opposed the proposal of segregation of debt management form itself, saying continuing the current institutional arrangement would be better, until a well thought out strategy for coordination is arrived at between the government and the central bank.

“There’s merit in continuance of the present institutional arrangement,” HR Khan, one of the deputy governors of the central bank, said in August last year.

“If at all, separation of debt management from the central bank has to be effected, it should be preceded by well-thought strategy focusing on perfect coordination among the Debt Management Office, the Ministry of Finance and the Reserve Bank of India,” Khan had said.

Khan had also argued against the segregation of debt management, citing the complexity and magnitude of the exercise and saying an independent debt management office, which would exclusively focus on debt management alone, may not be “able to manage this complex task involving various trade-offs".

The government has a massive gross borrowing target of Rs 6 lakh crore for 2015-2016.

The net borrowing for the year will be Rs 4.56 lakh crore. In the fiscal year 2014-2015, the government had a gross borrowing target of Rs 5.92 lakh crore and a net borrowing target of Rs 4.47 lakh crore.

There are also concerns about a possible conflict of interest, given that the new debt management office will report to the government, which itself is a participant in the bond market. This is probably one reason why the central bank has not been comfortable with the proposed new structure.

Even in terms of monetary policy, we will need to see whether the central bank will have a complete say from now on. Under the proposed new structure, for which the RBI has signed an agreement with the government, it will be be one of the members in a committee that decides the desired inflation target.

Others include a nominee from the finance ministry, while the rest will be external members.

RBI’s policy actions will then have to be shaped in line with inflation targets. Although the RBI governor will head the committee and have veto powers, this will be broadly a consensus-based mechanism.

Presently, the central bank enjoys full authority in deciding inflation targets and the course of its monetary policy. Often, the government and RBI aren’t on the same page, since the former tends to seek rate cuts in line with public demand.

In effect, the RBI will be left to handle only monetary policy and regulatory supervision.

Going ahead, the central bank’s authority may be curtailed further if the government also accepts the recommendations of a financial sector legislative reforms committee on the creation of an apex regulator to oversee sector regulators.

On the other hand, the budget envisages according more powers to the market regulator, Securities and exchange board of India (Sebi). Sebi will have more power when the commodity markets regulator, Forward Markets Commission, merges with Sebi.

In effect, the budget proposal will cut down RBI’s powers while Sebi will gain.