Finance minister Arun Jaitley has rolled back a proposal for an independent public debt management agency (PDMA), defusing tension between the government and RBI, with the latter retaining its status as the sole regulator of State bonds.
As the banking regulator and the bankers’ banker, the RBI is the main financial sector watchdog. As the currency administrator it prints money, and as the custodian of foreign exchange reserves it is responsible for preventing volatility in currency markets. Also, as the government’s merchant banker conducting State bond auctions it wields influence over managing liquidity in the system.
The RBI governor, Raghuram Rajan, faces a ‘trilemma’.
He has to keep the rupee from sliding further, cool inflation and create conditions that will boost growth, and also manage public borrowing while leaving enough funds in the system for companies and people to borrow.
Tackling all three simultaneously is a Herculean task. Central bankers aren’t prone to being swayed by forceful pleas or any quarter-specific syndrome. Instead, they always take a long-and-medium-term view of the economy. The decisions, arrived at after rigorous statistical analysis, are predicated upon past data and expectations.
The proposal for setting up an independent PDMA needs to be seen through the prism of RBI’s equally important, but sometimes competing, objectives.
The move, seen as the biggest regulatory shakeup in India’s money market operations, could have also implied that the RBI would have had to forego powers over a substantial part of the money market.
There was growing unease that the likely empowering of SEBI to regulate government bonds could potentially catapult the capital market watchdog to being a “super financial regulator” of sorts, given its control over the equities and commodities transactions.
That carries the risk of concentrating more than desirable powers to control liquidity in a single body.
By putting off the proposal for a PDMA, Mr Jaitley has hedged that risk, at least for the time being. The monetary policy framework agreement between the government and the RBI has made taming inflation priority for the central bank.
Under the new system, billed as the biggest monetary reform measure in a generation, the RBI has set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.
Let this system first pass the test of proof of concept and practice. The decision on an independent debt manager for the government can follow after that. Clichéd as it may sound one step at a time is always a better idea.