The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Ambikesh Mishra, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur
On 21st March 2014, ET published an article about RBI to loose control of the Govt of India’s bond market monopoly. This decision might strike as odd to a common investor but apparently this is the price RBI is willing to pay in exchange of Govt’s consent on its changed monetary policy.
RBI has changed its policy of monetary control and from now on will focus on inflation targeting, thus keeping the prices of the goods and services in check. The old policy of RBI was to change its monetary stance as and when the requirement arose by either targeting inflation or liquidity in the market.
As the GOI’s official investment banker, RBI’s role was to issue bonds in the market as and when opportunity was right and fetch good money for Govt as well as keep liquidity in the market going. Now SEBI is expected to take over this role from RBI and will sell GOI’s bonds in the market.
This seems like a trade-off RBI is willing to take as it will give them more room to stabilize the prices in the country and keep inflation in check, which will lead to a stable economic environment for production and investment.