The Reserve Bank of India (RBI) has advised the government to put the creation of a debt management office (DMO) on the backburner because of the huge borrowing programme this fiscal.
The bank has communicated its views to the finance ministry in an official letter written by former deputy governor Rakesh Mohan before he left RBI in June. Mohan?s letter said given the demands of the government?s net borrowing programme of Rs 3,97,957 crore this fiscal–a massive 52% more than in 2008-09–?The time is not ripe for the complete separation of debt management from the Reserve Bank at the current juncture.?
The finance ministry is at present working on a Bill to set up a separate DMO independent of the finance ministry and RBI. There is already a middle office housed within the finance ministry that crunches data, but a full-fledged office will have a far larger role. It will operate on an MoU with the finance ministry that will decide the amount of bonds to be floated each year, the price of the coupons, the tenor of the papers and even their periodicity.
The step is expected to bring in a large degree of transparency to the government?s debt management operations. The aim of the Bill is, therefore, to facilitate the expansion of the bond market, removing the overarching presence of the government as a market maker and price setter.
But the official communication from the former deputy governor means the RBI will lay out its opposition to the move if the Bill is tabled in Parliament. This will create problems when the Bill is sent to the standing committee on finance. RBI?s objections will scupper the chances of the Bill making it past the standing committee, even though the actual setting up of the office is not expected before 2011-12.
RBI will release its annual monetary policy on July 28, wherein these issues are again expected to surface. On conditions of anonymity as he is not authorised to speak to the press, a senior RBI official said the umbilical chord between Mint Road and the banks mean even such a large bond issue will sail through. ?But that will become very difficult for an independent body like a DMO,? he added.
NIPFP economist Ajay Shah said persisting with the RBI?s role in debt management is a clear conflict of interest. ?Monetary policy involves taking a call on interest rates that would often be the opposite of what the manager of the government bond programme would like to do?try for lower rates. This is why most major economies have shifted the office out of their central banks.?
The plan for an independent DMO was mooted in Budget 2007-08 and is based on a report issued by the finance ministry to develop a National Treasury Management Agency. The central government would own 51% in this entity and states would have the option to own the rest. The organisation is expected to make it possible for the government to explore raising foreign debt as well as launch new paper like inflation-indexed bonds that expand the government?s borrowing window.