Reserve Bank of India governor D Subbarao has said an independent debt management office to mange the government?s borrowing programme is not what the country needs. ?Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do,? said Subbarao.
His comments on the government plan is very significant as the finance ministry is drafting the legislation with the law ministry to set up the office within this financial year. The plan will take out the role of running the government debt programme from the RBI?s domain.
The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. ?These advantages are overstated,? Subbarao said at a meeting of the Central Bank Governance Group in Basel.
The above arguments, though valid in some countries, fail to recognise that in countries such as India, given the large size of the government borrowing programme, sovereign debt management is much more than merely an exercise in resource raising, he explained.
The size and dynamics of government borrowing has a much wider influence on interest rate movements, systemic liquidity and even credit growth through the crowding out of private sector credit demand. Management of public debt, therefore, has necessarily to be seen as part of broader macroeconomic management framework involving various tradeoffs, he exhorted.
?Once this is recognised, the centrality of central banks in this regard becomes quite evident. Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do,? he cautioned.
?The most potent of these arguments is the one relating to conflict of interest. The other pertains to mechanics of debt management which can be said to be model neutral,? he added.
The primary conflict which is generally associated with a central bank managing sovereign debt pertains to the one between its inherent responsibility as the monetary authority, and its obligations as a debt manager.
It is argued that the central bank will be biased towards a low interest regime in order to reduce the costs of sovereign debt even if it compromises its anti-inflation stance. A similar conflict may also distort its open market operations.
Subbaro further favoured panel like Monetary Policy Committee (MPC) of the Bank of England to decide the course of monetary policy. ?My own view is that we should be moving towards an MPC system, but in a phased manner,? he said.