As conflict of interest ends, RBI better placed now!

With debt management now coming under Sebi territory (earlier with RBI), trading in government bonds may see a new scenario change. While one faction is going all out criticizing the government over this decision, the other is calling it a much-wanted step in the right direction. At least it’s clear now that the central bank won’t deal in government bonds anymore.

RBI vs Finance Ministry

RBI vs Finance Ministry

If eFunds is to opine, this is the right way to go. Almost all the previous committees – (1) RBI annual reports, (2) the Jahangir Aziz Working Group, (3) the M. Govinda Rao Working Group, (4) the Justice Srikrishna Commission, (5) the Percy Mistry Committee, (6) the Raghuram Rajan Committee and (7) the Vijay Kelkar Committee on MOF restructuring have suggested that it’s better to release RBI of debt management duty.

It’s nothing but thwarting for an investor to purchase bonds from an institution that itself monitors interest rates. It’s the central bank that decided how rates will fare in the coming future. Isn’t it a classic example of corporate insider helping a trader?
So, the latest decision by the union government is laudable and allows RBI to only focus upon the prime objective of containing inflation like other central banks elsewhere. Now RBI doesn’t have a conflict of interest in its working and can easily decide the inflation policy.

As Ajay Shah puts it in “What is interesting in Budget 2015: the package of fiscal, financial and monetary institution building” – “Why did you fail on inflation?” “Because we were chasing debt management.” “Why did you fail on debt management?” “Because we were chasing inflation.”

Now with signing of the signing of the Monetary Policy Framework Agreement and establishment of a statutory Public Debt Management Agency, the central bank has sole objective to contain CPI.

As Sebi is all set to become accountable for debt management and delivering low cost of borrowing for the government, RBI should actually be very much relieved as now it can focus on inflation targeting in a better way.

Undoubtedly, the finance ministry has come out with a good decision to divide the works, where it has failed is in clearly articulating its intension to the media and the common man.

Anyhow, it’s clear

(1)RBI’s main job is to deliver CPI inflation

(2)Take on bond market reforms so that the central bank gets a monetary policy transmission

(3)Relieve RBI of the investment banking function

Ashish Pandey

I am a business journalist who is currently employed at Zee Business. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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