Thursday, April 30, 2015

5 steps forward, 2 steps back

The Ministry of Finance had begun:

  • Monetary policy framework agreement (MPFA)
  • Shift government bond market regulation to SEBI
  • Shift commodity futures regulation to SEBI
  • Establish the Public Debt Management Agency
  • Shift regulation-making power for non-debt flows (under Section 6 of FEMA) from RBI to MOF

Two  of these were rolled back today -- bond market regulation and PDMA. Here's a response by Ankur Bhardwaj in the Business Standard.

The lack of a bond market is going to weaken the monetary policy transmission, thus making it harder for the MPFA to work. The presence of debt management at RBI is a conflict of interest, which makes it harder for the MPFA to work. The reforms could have worked because they reinforce each other.

Now RBI will have excuses: lacking a monetary policy transmission, they were not able to do inflation targeting; owing to the problems of selling government bonds, they had to keep interest rates too low and SLR too high. The agent who has multiple objectives is accountable for none.

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