The government’s move to shift debt management to an independent agency from the Reserve Bank of India has raised concerns among central bank watchers, but many bond market participants believe the move is positive.
Finance minister Arun Jaitley announced in the Union Budget that the government would soon set up a public debt management agency (PDMA) and consequently, the RBI would no longer handle the government’s debt.
The move is on the lines of a recommendation by the Financial Sector Legislative Reforms Commission which proposed several measures that could dwindle the RBI’s powers.
“Doing this at present is risky because the RBI understands the financial markets and the risks involved, but the government or the agency may not necessarily do the same,” said Abheek Barua, chief economist at HDFC Bank.
However, Siddarth Rath who heads treasury and capital markets as Axis Bank believes the move is positive. “We still have no details and so we will have to wait and see what form it takes. But anything that gives a fillip to the bond market and makes it more transparent is welcome,” he said.
“We have a monetary policy authority which also manages a borrowing programme and we have, in the past, seen actions which bordered on a conflict of interest. To that extent, in the longer run, this is a positive move,” said the head of treasury at a foreign bank.
In advanced economies, public debt management is independent of monetary authority and is usually handled by the treasury. Many emerging market economies have also adopted the concept. However, the RBI has always felt that in a country like India where fiscal prudence is rare and government market borrowing has remained huge, debt management must remain under the monetary authority.
“I think some effective control of the RBI over this agency has to be there,” said Barua.
Besides managing the government’s market borrowing by conducting regular auctions, the RBI also manages its impact on systemic liquidity and interest rates by participating in the secondary market and purchasing or selling bonds through open market operations. While this could be construed as a clear conflict of interest, for the RBI it has eased policymaking.
Given its size, the government market borrowing in the past has exerted pressure on multiple aspects through liquidity and interest rates. It has tended to crowd out private borrowers as Indian banks are captive investors of such bonds under the Statutory Liquidity Ratio norm. Moreover, a large supply of sovereign bonds pushed up yields which are used as a proxy for pricing credit by banks.
Noting these monetary implications of a large government borrowing, the RBI had reserved its judgement on the shift of debt management away from the institution.
In a speech last year, deputy governor HR Khan said, “The size and dynamics of government market borrowing has a much wider influence on interest rate movements and systemic liquidity.”