India’s finance ministry has aborted its plan to clip the central bank’s wings. The ill-conceived proposal will have few mourners. Retrospective taxes have already dented the confidence of foreign investors in India. Taking control of trading in government bonds away from a well-functioning regulator would have caused more alarm.
The proposed legislative changes, now withdrawn, would have stripped the Reserve Bank of India of its powers to regulate the government securities market and manage public borrowings. An independent debt management office, which would stop the monetary policymaker from also functioning as the government’s investment banker, will still be set up in consultation with the RBI, Finance Minister Arun Jaitley told parliament on April 30. But the proposal to hand supervision of the bond market to the stock-market regulator seems headed for burial.
That’s just as well. The RBI is one of very few institutions in India that are both feared and trusted. It would have been a folly to pare down its regulatory role from ensuring overall financial stability to just overseeing banks. A proposed appellate authority with the power to second-guess the RBI’s decisions would have further undermined the central bank’s authority.
Mandarins in the finance ministry hoped to diminish the RBI’s regulatory power in return for giving Governor Raghuram Rajan greater autonomy over monetary policy.
But their timing was awful. Foreign investors have already been spooked by sudden demands for taxes on incomes earned in the past – a rude shock from a government that came to power a year ago promising to end “tax terrorism.” Foreign investments in Indian bond markets amounted to just $566 million last month, an 83 percent decline from January.
Thankfully, better sense has prevailed. Prime Minister Narendra Modi wants to boost infrastructure investment and make India a low-cost manufacturing hub. Any loss of credibility in India’s financial system would put the ambitious plans of railways, defence, transport and power ministries at risk. Withdrawing from the proposal to rein in the central bank’s powers is a welcome retreat – for both investors and for Jaitley’s cabinet colleagues.