Of the 34 OECD countries, half have a public debt office outside their monetary authority. The IMF has in its position paper on the subject pointed out that an independent Debt Management Office (DMO) is necessary to run an independent monetary policy, especially where fiscal dominance has thwarted the achievement of monetary objectives. There is no basis for RBI or its sympathisers outside to claim India is somehow so different that the proposal is fraught with pitfalls when implemented here. The evidence on the ground and literature both back up the plans. Also, India also has the requisite level of experienced officers whom the DMO can ask for on deputation from RBI and finance ministry to run this office competently. The only thing then that would seem to be holding back the plans and the legislation two years after it was announced in the budget is the sense of unease between the two institutions on this issue.
The debate on the DMO has moved beyond that of principles to one of turf and this is where it turns difficult. The reasons why a DMO makes sense are five-fold. These are the need to mobilise money quickly for financing the needs of government, to ensure the debt raised is paid off timely, to minimise borrowing costs, to keep the risks of fund raising at acceptable levels and to provide support for the development of domestic markets. RBI has argued that it has served the first four targets while the last is a much larger question. But this is where it makes an error. No corporate, irrespective of size, will enter the debt market where the government and the central bank keep on playing on rates. As of today, the government sets a borrowing target that it then asks RBI to fill in. An independent DMO will not have the backstop of a monetary authority and will therefore find it necessary to engage with the government to moderate its borrowing. This will act as a hard budget constraint providing the fiscal discipline, which the government sorely needs. The other is, of course, the financial discipline, which, as a key emerging market, India should be keen to adopt fast, instead of delaying. The monetary authority has no business to run the debt portfolio of the government. In a bout of inflation, interest rates should stay up, but if interest payments hurt the government, the central bank will be caught in a quandary. An independent DMO presents one such dilemma to the bank.
