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The government’s proposal to take the function of managing its debt from the Reserve Bank of India (RBI) is expected to have minimal impact on the borrowing programme for 2015-16.
The Street believes the transition will be smooth and it might take at least six to 12 months for the changes to fully take effect.
The Union Budget has proposed creation of a Public Debt Management Office, which will either manage the government’s debt or can source it to a third party.
The Centre's gross market borrowing is pegged at Rs 5.56 lakh crore for the financial year beginning April 1, compared with Rs 5.92 lakh crore this year. By the issuance calendar, the government will borrow Rs 3.6 lakh crore in the first half (April-September) of the new year.
“The changes might not happen at a time when the fiscal deficit is still high. Besides, the transition might even take beyond 12 months, due to which the borrowing programme will not have an impact in the next financial year. Whenever the shift happens, the government will ensure that it is smooth and has little impact on the government bond market,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
The government has also proposed to amend the RBI Act to take away money market regulatory powers from the central bank and bring it under the purview of the Securities and Exchange Board of India. 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,” said an official with a primary dealer. Primary dealers buy public bonds directly from the government, for resale.
Last week, Jaitley said the government would not take away any ‘significant’ power of RBI and a clarification on the central bank's role in regulation of the bond market would be provided in April, during the debate on the Finance Bill.
“The market still awaits clarity on whether the government will strip RBI of power to regulate the government bond market. I believe 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.
