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Budget: Inflation Targeting May Reduce RBI Powers, Say Analysts

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Budget: Inflation Targeting May Reduce RBI Powers, Say Analysts

Mumbai: The move to set up a separate Public Debt Management Agency (PDMA) to manage market government borrowings and public debt and also a Monetary Policy Committee for inflation targeting may reduce the powers of the Reserve Bank of India, say analysts.

The proposals are a way of curtailing the powers of the RBI, apart from increasing the debt burden on the country, a tax and banking expert said.

Noting that the RBI has been doing a commendable job in handling public debt management, Ashvin Parekh, a financial services expert who retired from EY and is currently the managing partner of Ashvin Parekh Advisory Services, said the move is unfair on the RBI.

"The move to set up a separate PDMA is a bit drastic for reducing the powers of RBI as it comes with many pre-conditions. After all, RBI has been doing a fairly good job in the past on this front, especially during the East Asian currency crisis and also during the recent flight of capital following the Fed's tapering talk," Mr Parekh told PTI.

While presenting the Budget, Finance Minister Arun Jaitley said following a report by the FSLRC or Financial Sector Legislative Reforms Commission, headed by BN Srikrishna, the government proposed to set up a PDMA.

The FSLRC report in March 2013 had also recommended that Sebi, Irda, PFRDA and FMC (Forward Markets Commission) be merged into a single entity into a unified financial agency.

On this, Mr Jaitley said, "We have also received a large number of suggestions regarding the Indian Financial Code, which are currently being reviewed by the Srikrishna panel. I hope, sooner rather than later, to introduce the IFC in Parliament for consideration."

Mr Parekh also pointed out the move will only increase the debt burden on the public maturity of government debt which is long term and that one of the key focus of the Budget is to increase debt-driven investment.

Another analyst who does not want to be named also echoed similar views saying the recommendations of the FSLRC that may impact on the powers of the RBI or having a single financial sector regulator by merging all the four regulators now, are not worth implementing,

"Why to change when everything is going on well?" he quipped when asked about the need for a separate debt management agency."

"If we keep raising more and more debt, we may be falling into a trap of the many Western European countries. It will lead to burden on future government as debt are paid later and we will be leaving our future generations into debt trap. Even China is having second thoughts on debt-driven investment spree it has undertaken in the past," he said.

It can be noted that even though it was RBI Governor Raghuram Rajan who suggested the monetary policy committee, he was critical of some of the FSLRC recommendations.

Terming the FSLRC report calling for a unified financial regulator as "somewhat schizophrenic", Mr Rajan had said, "There is no discussion of the empirical magnitude of the synergies gained or synergies lost which makes the recommendations seem faddish and impressionistic rather than based on deep analysis."

The RBI Governor had suggested setting up of monetary policy committee following the acrimony between the apex bank and government on interest rates cuts. He had said Parliament should set an inflation target for the central bank instead of the current discretion-based targeting of inflation, and set up a monetary policy committee a la the US Fed Open Market Committee.

However, Crisil chief economist D K Joshi welcomed the measures saying in most countries public debt management is not handled by the central bank.

"There is no question of RBI losing its powers. On the contrary, it can help RBI focus more on its core functions. On another note, it will deepen the bond market."

"It will also facilitate better planning and management of domestic and foreign market borrowings of the centre, apart from reducing the operational burden on the Reserve Bank and help it focus on core functions related to monetary policies," Mr Joshi told PTI.

State Bank of India (SBI) chief economist S K Ghosh said the proposed PDMA will help promote investment. On any move to shift public debt management from RBI to a debt management office, he said it is an globally accepted best practice as most OECD (Organisation for Economic Co-operation and Development) countries have already established dedicated debt management units. Also, emerging economies like Brazil, Argentina, Colombia and South Africa have restructured and consolidated debt management.

As per the Budget, primary deficit declined to 0.8 per cent of GDP in revised FY15 budget estimate from 1.1 per cent in FY14. It is budgeted at 0.7 per cent of GDP in FY16.

As of the September quarter, almost 92 per cent of the country's debt is domestic, when the total debt stood at Rs 4,960,472.3 crore or 43.7 per cent of GDP. External debt constituted only 8.3 of this.

Both these measures will need the RBI Act to be amended, which currently gives a lot of discretionary powers to the apex bank.

Mr Jaitley had said capital account controls was a policy and not regulatory matter and therefore the Foreign Exchange Management Act would be amended to clearly provide for the government to exercise power in respect of control on capital flows, in consultation with the RBI.

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