After successfully setting up the Monetary Policy Committee (MPC) recently to set policy interest rates, the finance ministry on Wednesday initiated steps to set up an independent Public Debt Management Agency (PDMA) to take over the government debt management functions from the Reserve Bank in two years.
In an office memorandum, the ministry said a decision has been taken to set up a Public Debt Management Cell (PDMC) in the Budget division of the Department of Economic Affairs, as an interim arrangement before setting up an independent and statutory PDMA, in due course.
“This interim arrangement will allow separation of debt management functions from RBI to PDMA
in a gradual and seamless manner, without causing market disruptions. The PDMC shall be upgraded
to a statutory PDMA, in about 2 years,” the memorandum said. Till such time, the PDMC will have only advisory functions to avoid any conflict with the statutory functions of RBI, it added.
The PDMC advisory functions would include planning and management of central government borrowings, monitor cash balances, improve cash forecasting and promote efficient cash management practices. Other functions included foster a liquid and efficient market for government securities, develop an Integrated Debt Database System (IDMS) as a Centralised data base for all liabilities of government and undertake requisite preparatory work for PDMA.
The joint secretary (budget) would be the overall in-charge of the PDMC, which will be housed at the RBI’s Delhi office. The transition process from PDMC to PDMA would be implemented by a joint implementation committee (JIC).
JIC would operate under the supervision of the Monitoring Group on Cash and debt management with economic affairs secretary and RBI deputy governor as co-chairpersons. The PDMC would be staffed by 15 debt managers from Budget division, RBI, current middle office and other government units. The extant middle office of the Budget division in the ministry will be subsumed into PDMC with immediate effect.
Originally, the government had proposed in Budget 2015 to set up MPC as well as PDMA. However, these proposals were withdrawn from the finance Bill 2015 after differences cropped up with the RBI over the structuring of the two bodies. After consultation with RBI, the government amended the RBI Act through finance Bill 2016 and now a six-member MPC has been set up with equal representation from RBI and government-appointed members.
The PDMA proposal was hanging fire as RBI opposed the transfer of the back office to the PDMA. The latest announcement indicate that differences between the government and RBI have been narrowed down on the PDMA front.
The creation of the PDMA, it is reckoned, would enable RBI to focus on its core function of monetary policy (flexible inflation-targeting) and regulating banks. Such an agency is also expected to lower the government’s borrowing costs eventually and foster a liquid and efficient G-Secs market.
The idea is also to resolve the conflict of interest involved in RBI, simultaneously targeting inflation
by calibrating interest rates and regulating as well as managing government debt.