The central bank of the country does not speak out of turn. So what it writes and does not write about are equally significant. It is, therefore, curious that in its annual report, despite expending a lot of space on debt market developments, the RBI did not see it fit to comment on, or even mention, the most significant policy development on debt announced by the government this year. This is the Budget promise to set up a Debt Management Office (DMO). The omission is all the more curious because the bank?s substantial body of literature, put out ever so diligently with due regularity, always makes it a point to analyse all policy issues and developing economic trends.
Yet, the DMO is conspicuous by its absence. The DMO plan, as laid out in the Union Budget for 2007-08, is very significant. Just how much so can be judged from the latest firefighting measures being adopted on market stabilisation scheme (MSS) bonds, the upper limit for which has recently been raised to allow their further issuance to sterilise excess liquidity in the economy caused by the RBI?s purchase of dollars. The government and the central bank have to take a call if they should continue to buy up the inflow of dollars into India and risk inflation/hardening interest rates, or let the rupee rise and painfully force domestic industry to adjust to global efficiency levels. The call has been made difficult because debt management, which involves the issuance of MSS bonds, is still linked with the RBI?s monetary management.
What we need is clarity. This is where the DMO steps in. In the first phase, the government will locate a middle office in the finance ministry that would analyse economic inputs, like, in this case, the economy?s capacity to absorb dollar inflows. This unit can later be developed into a full-fledged DMO to sell and buy bonds on behalf of the government. The responsibility of government debt management will thus shift from the RBI to an independent body that reports to the finance ministry. Freed of the need to keep debt markets in an orderly condition, the RBI can concentrate on monetary policy.
As the Budget says, the plan is predicated on success in fiscal consolidation. The DMO is, therefore, not a routine change of turf or anything of the sort. It is a move that contains clear economic logic, and is meant to signal a better way of managing conditions in the economy. Moreover, it also shows the government?s commitment to the adoption of good practices in the debt market. Given that the central government?s debt makes up a huge part of the overall debt market, it stands to reason that reforms have to begin here.
In reality, its development, or lack thereof, can be viewed in the context of Mint Street?s apparent reluctance to take measures that would make Indian debt markets vibrant. The Indian capital market is too dependent on equities. Financial savings in India have very few attractive avenues. Sebi data shows that till the end of September 2007, foreign institutional investors (FIIs) had invested $12.2 billion in the Indian equity market, but had put in less than $1 billion in debt?government and corporate, combined. Data from mutual funds is also along the same lines. The corporate bond market, too, has just failed to take off in the manner we had hoped. On October 4, this market saw a trading volume of just Rs 623.82 crore?via 129 transactions.
The domestic debt market, then, remains woefully undeveloped. It is more like a model traffic park, with signals and road furniture all over the place, sans real players.
Why, then, does the RBI seemingly give such short shrift to the plan? Sure, it has not said at any point that it has an objection to the DMO proposal. But the silence in the 250-page report, and one that comes just six months after the Budget was presented, does seem eloquent. The DMO has figured just once in its monthly bulletin?for May?and that too, merely as part of the summary of the Union Budget.
Any special reason?
