Curtailing RBI's debt powers to have minimal impact on govt's borrowing programme

Experts say transition will atleast take 6-12 months

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The government’s proposal to take away Reserve Bank of India's (RBI) power to regulate government bonds is expected to have minimal impact on the borrowing programme for the next fiscal as the street believes the transition will be smooth and may take at least 6-12 months to actually come into effect.

The gross market borrowing of the government is pegged at Rs 5.56 lakh crore for the next financial year beginning April 1, 2015, compared with Rs 5.92 lakh crore this year. As per the issuance calendar, the government will borrow Rs 3.6 lakh crore in the first half (April-September 2015) of the new fiscal.

“The changes may not happen at a time when the fiscal deficit is still high. Besides that the transition may take even beyond 12 months due to which the borrowing programme will not be impacted in the next fiscal. Whenever the shift happens, the government will ensure that it is smooth and it has little impact on the government bond market,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.

The government has proposed to amend the Reserve Bank of India (RBI) Act to take away money market regulatory powers from the central bank and bring it under the purview of Securities and Exchange Board of India (Sebi). Though the proposal wasn’t mentioned in the Budget speech of Finance Minister Arun Jaitley, 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 move is part of an overhaul intended to expand bond markets in a bid to attract retail investors and improve the transmission of monetary policy. 

“The government will do what is good for the government bond market. Considering it is government borrowing, it will be ensured that the transition is smooth and this would result in ideal design for the market,” said an official with a primary dealer. Primary dealers buy government bonds directly from the government with an intention to resell them.

Last week Jaitley assured the street that the government will not take away any 'significant' powers of the RBI and a clarification on the central bank's role in the regulation of bond market will be provided during the debate on Finance Bill 2015 when Parliament reconvenes on April 20.

“The market still awaits clarity on whether the government will strip RBI of power to regulate the government bond market. I believe a status quo will be maintained and RBI will continue to have the powers. In that case there will be no impact on the government’s borrowing programme,” said S Prabhu, vice president and head of fixed income at IDBI Federal Life Insurance.