RBI and G-secs market

| Updated on September 02, 2021

RBI Governor Shaktikanta Das wants G-Sec managment to remain firmly in the hands of the central bank   -  REUTERS

Management and regulation of the G-sec market should remain with the RBI, for now

In his recent address at the FIMMDA-PDAI annual conference, Reserve Bank of India (RBI) Governor, Shaktikanta Das, made some forceful arguments for why the central bank should remain the regulator for the government securities (G-sec) market. The Governor’s speech should be seen in the context of recent statements by the Securities and Exchange Board of India (SEBI) Chairman Ajay Tyagi calling for unification of corporate and government bond markets under the SEBI. The RBI has been facing criticism, of late, due to the manner in which it is controlling government bond yields. While the central bank has reiterated that the yield management is critical for keeping borrowing costs in the economy low, it has also acknowledged that low bond yields are needed to control the government’s interest burden. At a larger level, this has revived the debate over whether public debt management should remain with the RBI, and whether it is causing a conflict of interest with its other objectives such as inflation management and orderly functioning of the financial market. While most central banks which also manage government debt face a similar dilemma, it does not seem the appropriate time to tinker with RBI’s functions.

The central bank currently needs all its powers to support the government in the ongoing crisis. Control over the G-sec market is critical in order to discharge many of its key functions such as management of systemic liquidity, regulating foreign exchange market and maintaining financial stability. With the central bank being the repository of G-secs and overseeing the trading in these securities, it can efficiently balance system liquidity and manage the liquidity caused by foreign portfolio and FDI flows, thus keeping exchange rate stable and interest rates across maturities under check in order to foster growth. The market intelligence that comes from this control over the G-sec market is much needed at this juncture. It is uncertain if moving primary issuances of government bonds to stock exchanges will work as the composition of participants in equities is quite different from the G-sec market, which is institution-driven. Given the difference in deal sizes, risk management and surveillance requirements and participant’s temperament and behaviour, the RBI seems more suited to be the G-sec market watchdog.

That said, the situation in the advanced markets also needs to be taken note of. Public debt management is a function under the Bureau of Public Debt under the US Treasury Department while in the UK, the Debt Management Office functions under the Treasury department. India began working towards this bifurcation in 2018 with the proposal to set up public debt management cell in the Budget division but there has not been much progress on this since. It may be inevitable over the long term for India to borrow from the US and UK experience so that the RBI can focus its attention on monetary policy and financial stability. But, for now, the central bank should not be disturbed in its functioning and powers.

Published on September 02, 2021

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