Confusion on RBI Act Changes to be Cleared in Parliament: Jaitley

Mumbai: Amid apprehensions that a Finance Bill provision may lead to the Reserve Bank of India (RBI) losing regulatory powers for money market securities, Finance Minister Arun Jaitley has said any ambiguity in this regard will be duly discussed in Parliament.

Mr Jaitley, who was here on Saturday to meet foreign portfolio investors at the NSE, said, "I don't want to talk about that (provision) outside (Parliament). If there is any ambiguity about the Finance Bill, we will discuss that in Parliament."

The minister was replying to a question about the government's move, as mentioned in the Finance Bill but skipped in the Budget speech, to take the regulation of the money markets from the RBI and give it to capital markets watchdog Securities and Exchange Board of India (Sebi).

Mr Jaitley did not elaborate on this and also parried questions on tax issues related to foreign portfolio investors (FPIs).

Sources said the minister met around 50 odd FPIs and is said to have allayed their fears on the notice they got from the CBDT on MAT.

The minister was accompanied by Finance Secretary Rajiv Mehrishi, and Joint Secretary Manoj Joshi. Senior officials from Morgan Stanley, UBS and Principal Global, among others, were present.

Even RBI Governor Raghuram Rajan had expressed some doubt about the issue saying nothing was mentioned in the Budget speech earlier this week.

"There are some clauses in the Finance Bill referring to this. But the Finance Minister's speech did not contain any reference to this; the speech generally flags the important actions of the government. I am not worried this will happen," Mr Rajan had said.

During the Budget speech, Mr Jaitley said the government and the RBI on February 20 signed a framework agreement to set up a monetary policy committee, under which Parliament will set an inflation target to the central bank, apart from setting up a separate agency - PDMA or Public Debt Management Agency, to manage government borrowings and other public debt by amending the RBI Act.

Analysts said though both the moves were mooted by the RBI - the monetary policy committee by Governor Rajan following the Urjit Patel committee report and the PDMA by then governor Bimal Jalan way back in 2002, these moves will take away some crucial powers of the central bank.

Under the current system of regulations, money markets are controlled by the RBI, but mutual funds, which are major players in the money market, are regulated by Sebi.

During the customary post-policy conference call with the analysts on March 4 when Mr Rajan surprised the market with a 25 basis points reduction in the repo rate to 7.5 per cent, the RBI Governor said that the proposed PDMA will not be clipping RBI's wings and that he is not worried about the move.

Mr Rajan said the proposed formation of the PDMA is a work in progress and will take some time to from. "My sense is that when it finally emerges, it will have a lot of RBI presence and support to avoid the reinventing the wheel."

When asked whether the proposed PDMA will be independent and would not suffer from conflict of interests, Mr Rajan had said, "I have said in the past that these issues of conflict of interests are probably not the most important things now."

The Finance Bill seeks amend in sections 45U and 45W of the RBI Act to enable this shift.

The proposed amendment to section 45W says: "Any direction issued by the Reserve Bank, in respect of security, under chapter III D of the RBI Act, shall stand repealed."

This means that the RBI will cease to regulate government bonds and other money market instruments. These powers were given to the central bank after amending the RBI Act in 2005-06, to enable it better ensure financial stability.

Both these proposals are part of the Financial Sector Legislative Reforms Commission prepared by N Srikrishna and submitted in March 2013.