Govt wants Sebi, not RBI, to regulate money market

Move to shift powers from Reserve Bank without discussions baffles many

The government has proposed to amend the Reserve Bank of India 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 (Sebi).

The proposal found no mention in the Budget speech of Finance Minister Arun Jaitley but the Finance Bill proposes to amend section 45U and 45W of the RBI Act which in effect takes away the powers from the central bank to regulate government securities and other money market instruments.

The amendment to Section 45W says “any direction issued by the Reserve Bank of India (RBI), in respect of security, under chapter IIID of Reserve Bank of India Act, shall stand repealed”.

Usha Thorat, former deputy governor of RBI, said “certain powers in relation to regulate money market instruments and products and derivatives based on these instruments were given to RBI in 2005-06 by amending the RBI Act and this happened after a lot of discussion. Now, with this amendment in the Finance Bill, all these provisions are proposed to be withdrawn. RBI has got responsibility for financial stability and the power to regulate forex and money markets was given to RBI to enable it to fulfil its mandate for financial stability.”

Thorat said “before such sweeping changes are brought about through the Finance Bill, there has to be an understanding of the purpose for such changes and whether these are indeed in the interest of financial stability.  It has to go through a lot of discussion and dialogue.”

Regulations relating to issuance and investments of commercial papers, interbank repo or any other repo and reverse repo which are instruments of raising liquidity by keeping as collateral as government securities will no longer be regulated by RBI, if the proposed amendments goes through.

To be sure, these amendments are not an extension of the Public Debt Management Act, which essentially, deals with primary issuances of government securities. After the proposal is enacted, public debt management will be under the purview of Public Debt Management Agency and not RBI.

Speaking to analysts on March 4, RBI Governor Raghuram Rajan said that the proposed amendments were not part of the finance minister’s Budget speech. Answering a question on the shifting of regulatory powers over debt markets from the RBI, Rajan said he expects the proposed changes would not take place.

“On the shifting of regulatory powers over debt markets from the RBI, there are indeed some clauses in the Finance Bill referring to this but the Finance Minister’s speech did not contain any reference to this and the Finance Minister’s speech generally flags the important actions of the government. I am not worried that this will happen,” Rajan had said.

The proposal to shift money market regulations away from RBI was made by the Financial Sector Reforms and Legislative Council (FSLRC), along with many other recommendations. Though there were exhaustive discussions on most proposals the proposal to shift money regulations from RBI was never discussed.