It is best to leave debt management to RBI

22 Jun, 2011, 06.09AM IST, RK Pattnaik - The Econimic Times

There has been some debate in the past on the separation of debt management from the Reserve Bank of India in the Indian context. A perusal of the debate revealed that in the RBI itself there were differences of opinion. Nevertheless, the recent statement of the RBI governor against the separation is praiseworthy, particularly in the context of the proposal in the Union Budget 2011-12 to introduce the Public Debt Management Agency Bill.


The ministry of finance (MoF) of the government of India (GoI) should consider revisiting the whole issue in the light of the governor's public statement as, globally, there is a wide recognition that debt management is no longer a routine exercise. For prudent fiscal, monetary and debt management, it is advisable that debt management should continue with the RBI. The separation of debt management from RBI will not be helpful; it will have an adverse impact on the market.

First, in the dynamic environment created by the introduction of the Liquidity Adjustment Facility (LAF) in 2000 and the prohibition on RBI's participation in the primary market under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, the primary market interest rates, which are auction-driven, are no longer viewed as interest rate signaling by the RBI. Therefore, the conventional argument that there is conflict of interest does not have much validity. Furthermore, the cost of government borrowings is inextricably linked to the level of fiscal deficit rather than the arrangement for debt management by the central bank.

Secondly, independent management and issuance of government debt could distort the sovereign yield curve in a thin market, jeopardisingthe monetary signaling and its transmission across the yield curve.

Thirdly, a likely outcome of the separation could be the emergence of multiple debt management agencies, viz one for the state governments' market borrowings and another for the central government borrowings. What will happen to the public debt offices of the RBI?

In such a scenario, coordination among debt managers will be difficult and will eventually lead to conflict and confusion. Fourthly, evidence suggests that the smooth conduct of the government's large borrowing programme has been facilitated because the RBI, apart from the banker and debt manager to the government, also has broad range of responsibilities, including regulations and surveillance of financial institutions, financial markets and market infrastructure.

Thus, the RBI successfully manages the government borrowing programme with its apt knowledge and vast experience in studying market liquidity, investors' appetite and risk constraints, apart from timing of debt issuance in line with its avowed objective of maintaining financial stability. Fifth, evidence suggests that the cash management of the government has remained poor and inefficient.

The RBI, as banker and debt manager, has been helpful in accommodating the deficit and surplus mode, taking into account the absorptive capacity of the market. One doubts if an independent body will have such experience to handle cash management of such magnitude and varying degree. Sixth, in the post-crisis environment globally, there has been a rethinking that debt management is again becoming a critical element in the overall conduct for financial stability as events in Greece have shown.