In the Annual Policy Statement of the Reserve Bank of India (RBI) 2009-10 there is a reference to the Open Market Operations in para 28. “Keeping in view the large budgeted government market borrowing in 2009-10 coming on top of a substantial expansion in market borrowing in 2008-09, it was important for the RBI to provide comfort to the market so that the borrowing programme is conducted in a non-disruptive manner. Accordingly, the RBI simultaneously indicated its intention to purchase government securities under open market operations (OMO) for an indicative amount of Rs 80,000 crore during the first half of 2009-10.”
Under the Fiscal Responsibility and Budget Management Act, the RBI is prohibited from operating in the primary market for government securities. But it has already violated the provisions of the Act in spirit a couple of times (See ‘Monetisation of the fiscal deficit’, March 23, 2009). Now there is a third deviation from the law. In order to help banks to subscribe to new gilt-edged securities, the RBI purchases old bonds (including those of MSS) from the market. Nowhere else in the world is an OMO of this type undertaken for debt management. It is primarily a monetary policy weapon but the RBI has used it for providing funds to the government albeit indirectly. It is really a Debt Management Operation (DMO). This is not semantics. It has a fundamental implication for the objectives for policymaking. It would be more honest not to engage in any charade but to scrap the relative provision in legislation while retaining the targets for revenue and fiscal deficits to minimise the damage. Till this happens, the government can issue securities on a private-placement-basis to the RBI. The law under reference is not justiciable.
A Seshan, Mumbai
