The finance ministry’s report on government debt recommends a National Treasury Management Agency (NTMA). RBI is to give up managing debt. What’s the rationale?
The basic conflict is an inflationary bias in monetary policy since the central bank (and debt manager) is inclined to sell bonds at high prices, i.e. to keep interest rates low. In India, the central bank is also the bank regulator. So, it can persuade banks to hold government debt.
The RBI has done a commendable job of separating debt and monetary management and of trying to minimise these conflicts. But burdening it with these conflicting objectives is an institutional problem, and has been recognised as such by the RBI itself.
Under NTMA, the first step will be consolidation of data on government liabilities. Internal and external debt management is currently split across the RBI and the finance ministry. A consolidated database will allow better information transmission to the bond market. This will increase investor confidence and lower interest rates. The transparency requirements that the report (and the draft Bill) propose for the NTMA will ensure that information asymmetries between market participants and the NTMA are reduced.
NTMA is to “minimise borrowing costs over the long term within an acceptable level of risk”. To do this it can issue new instruments of debt, including inflation-indexed bonds and dollar-denominated bonds. It can tailor debt instruments to various investors, and also lower the cost of financing by widening and deepening the market for government securities market. Since effective debt management and a well-developed securities market are intertwined objectives, the report emphasises that one of the functions of the NTMA will be to help develop the securities market in India. Also, since the NTMA will have access to market participants as well as to internal technical expertise, it will be in an ideal position to partner Sebi in its mandate to develop securities markets in India.
The other main functions of the NTMA envisaged by the report are cash management and management of contingent liabilities. While these may materialise only in the medium-long term, the NTMA can eventually play an important role in active cash management in India. The report recommends that as per international best practice, the NTMA should move towards using the money market as a means to meet short-term liquidity requirements of the government, instead of our prevailing ways and means mechanism.
Also, there does not currently exist an integrated database regarding contingent liabilities in India, and the report recommends that the NTMA move towards building such a database. Internationally, contingent liabilities of the government are monitored, priced and valued by the debt manager. This allows investors to have a better idea of the entire debt portfolio of the government. It also serves as an internal check and balance mechanism to prevent large-scale accumulation of implicit (off-budget) liabilities.
A major part of the report focuses on transparency and accountability. The NTMA’s role is defined very precisely as an agent of the government. The report details the institutional mechanism through which the NTMA would receive its debt strategy mandate, and how the NTMA would implement, not decide, government strategy. The draft Bill addresses this as well.
This can be achieved, as the report emphasises, only when the NTMA works in close consonance with RBI and Sebi. The report details a transition mechanism for debt management, recognising that the process will be gradual and there are some functions that can move more easily than others. This transition may also impact some of RBI’s current monetary instruments like the market stabilisation scheme (MSS). The report highlights these, and recommends stakeholder consultation, gradual transitions and lessons from international experience as possible methods to resolve them.
—The author is consultant, National Institute of Public Finance & Policy. These are her personal views