May 4, 2015 / 2:32 AM / in 5 years

BREAKINGVIEWS-India's aborted central bank plan has few mourners

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Andy Mukherjee

SINGAPORE, May 4 (Reuters Breakingviews) - 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The proposed legislative changes, now withdrawn, would have stripped the Reserve Bank of India of its powers to regulate the government securities market and manage public borrowings.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.

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CONTEXT NEWS

- India’s finance ministry has withdrawn proposed clauses in this year’s budget bill that would have stripped the Reserve Bank of India of its powers to regulate trading in the government bond market and manage public debt.

- An independent public debt management office, which would stop the monetary policymaker from also functioning as the government’s investment manager, will now be set up in consultations with the RBI, Finance Minister Arun Jaitley told parliament on April 30.

- The retreat came after a group of RBI officials wrote to lawmakers and state chief ministers expressing concern over the changes before a vote in parliament, according to Indian media reports.

- Separately, Jaitley has assured foreign investors that, starting this financial year, they won’t be charged a 20 percent minimum alternate tax on income from securities transactions, royalties and technical services. However, the judiciary would decide if past incomes would also be exempt from the levy.

- Monthly foreign investment inflows into Indian bond markets slumped by 83 percent between January and April.

- Reuters: India’s Jaitley tries to buy peace with RBI, foreign investors

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