Money & Banking

Das emphasises importance of G-Sec market in RBI policy making

Our Bureau Mumbai | Updated on September 01, 2021

RBI’s regulation of govt debt market has synergy with its role as banking watchdog

The Reserve Bank of India (RBI) made it plain to the Securities and Exchange Board of India (SEBI) that it will not yield ground when it comes to regulation of the government securities (G-Sec) market.

RBI Governor Shaktikanta Das, on Tuesday, emphasised the importance of the central bank’s direct access and oversight of the government securities market, stating that it enables the management of stress in the foreign exchange and interest rate markets.

The Governor’s observation assumes significance as it comes in the backdrop of SEBI Chairman Ajay Tyagi seeking unification of the G-Sec and corporate bond markets, which could bring G-Sec under the market regulator’s ambit.

Critical market

Highlighting the criticality of the G-Sec market for effective discharge of RBI’s functions, Das underscored that the RBI’s regulation of it has a strong synergy with its role as the banking regulator as banks are the largest category of participants in these markets.

Unified regulation

He mentioned that this is also highlighted in the recent G30 report which identified the balkanized regulation of US Treasury markets as having adversely impacted market making.

In his address at the 21st FIMMDA-PDAI annual conference, Das highlighted that the current arrangement of the G-Sec repository residing with the RBI facilitates seamless conduct of liquidity operations and simultaneous settlement of G-Sec trading.

“This provides confidence to investors, removes custodial risk, and minimises transaction costs. Access to real time market intelligence arising from ownership or oversight of market infrastructure is critical for fine-tuning timely policy responses,” he said.

Das called attention to the fact that the current regulatory arrangement offers synergies in terms of a unified market for G-Secs, repo in G-Secs, liquidity and other monetary operations, exchange rate management, regulation for key derivative markets, public debt management, and prudential regulation of banks, the largest category among market participants.

Close coordination

He noted that the synergy between the RBI’s responsibility for key macro market variables – interest rates and exchange rates, which ensures overall financial market efficiency – and its obligation to ensure stability while keeping in mind the objective of growth is well-accepted.

“With the development of the domestic financial markets and deregulation of interest rates, effective transmission of monetary policy impulses relies on the G-Sec market being deep and liquid so as to create the intended impact on interest rates by linking expectations of future short-term rates to current long-term rates,” Das said.

Similarly, a well-functioning G-Sec market ensures efficient discharge of the public debt management function.

He also remarked that the public debt structure – quantity, composition and ownership of debt – also influences monetary conditions.

“In the wake of the pandemic, when fiscal response resulted in a sharp increase in government borrowing, the market operations conducted by the Reserve Bank not only ensured non-disruptive implementation of the borrowing programme, but also facilitated the stable and orderly evolution of the yield curve,” the Governor said.

Das stressed that monetary policy, G-Sec market regulation and public debt management, therefore, need to be conducted in close coordination, and the primary focus of such coordination is the G-Sec market.

Published on August 31, 2021

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