The government has suggested amending the Reserve Bank of India (RBI) Act to remove the central bank’s money market supervisory responsibilities and place them under the Securities and Exchange Board of India (SEBI). The Finance Bill proposes to change sections 45U and 45W of the RBI Act, thus stripping the central bank of its powers to control government securities and other money market instruments, even though the idea was not addressed in Finance Minister Arun Jaitley’s Budget speech. Any order issued by the Reserve Bank of India in respect of security, under Chapter III D of the Reserve Bank of India Act, shall stand canceled, reads the change to section 45W. Certain powers with respect to regulating money market instruments and products, as well as derivatives based on these instruments, were provided to RBI. All of these provisions are now planned to be withdrawn as a result of this revision to the Finance Bill. RBI was granted responsibilities for financial stability, as well as the authority to control forex and money markets. Any order issued by the Reserve Bank of India in respect of security, under Chapter III D of the Reserve Bank of India Act, shall stand canceled,” reads the change to section 45W.
Certain authorities in respect to regulating money market instruments and products, as well as derivatives based on these instruments, were provided to RBI in 2005-06 by modifying the RBI Act, and this happened after a lot of discussions, said the former deputy governor of the RBI. All of these provisions are now planned to be withdrawn as a result of this revision to the Finance Bill. RBI was granted responsibilities for financial stability, as well as the authority to control forex and money markets. Before such drastic changes are enacted through the Finance Bill, it is necessary to understand why they are being enacted and whether they are in the best interests of financial stability. It must go through a lot of debate and discussion.
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If the proposed modifications pass, the RBI will no longer have control over regulations governing the issuance and investment of commercial papers, inter-bank repo, or any other repo or reverse repo used as instruments to raise liquidity by holding these as collateral as government assets. To be clear, these modifications are not a continuation of the Public Debt Management Act, which primarily regulates primary government securities issuances. After the plan is passed, the Public Debt Management Agency, not the RBI, will be in charge of public debt management. According to RBI Governor Raghuram Rajan, who talked to analysts on Wednesday, the suggested revisions were not included in the finance minister’s Budget announcement. Rajan remarked that he does not expect the proposed changes will be implemented in answer to a query concerning the proposed transfer of regulatory authority over bond markets from the RBI. The RBI has regulatory jurisdiction over debt markets, according to several clauses in this Finance Bill. However, the finance minister’s address, which generally emphasizes the government’s new projects, made no mention of this.
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