RBI wants to head public debt management agency

Written by Sunny Verma | New Delhi | Updated: Feb 8 2012, 07:59am hrs
The Reserve Bank of India (RBI) has agreed with the governments proposal to have a Public Debt Management Agency, but said it should be allowed to head the same.

Finance minister Pranab Mukherjee had announced setting up of this agency in order to delink the central bank's role as a monetary authority from that of a government debt manager.

According to official sources, in its comments on the draft legislation on the Public Debt Management Agency of India (PDMAI) given to the government, the RBI has endorsed the plan, subject to certain conditions. The government is hoping to introduce the relevant Bill in the Budget session. But unless the differences with RBI are bridged, it might take a while before the Bill is introduced in Parliament.

Currently, the tasks of treasury management in the country is performed by a host of agencies the RBI handles issuance of domestic debt, the finance ministry oversees external debt, the central accounts section tracks contingent liabilities. There is, therefore, there is no integrated view of the full portfolio of public debt.

The total outstanding public debt of the government increased to R32.13 lakh crore at end-September 2011 from R31.28 lakh crore at end-June 2011. Internal debt constituted 90.3% of public debt at September-end 2011. The outstanding internal debt of the government at R29.01 lakh crore crore constituted 32.3% of GDP.

They (RBI) have sent their views. They highlighted some issues where they want some things to be done in a certain manner, a senior official said, without elaborating. He indicated that the RBI wants to retain its control over the agency, as it considers it essential to maintain stability in the government securities market and the financial market as a whole.

The central bank also highlighted that the role of a central bank in managing the government debt has become even more pertinent after the sovereign debt crisis in eurozone economies. The RBI has told the government to go slow on the proposal given its implications on the financial sector.

The government is on course to borrow as much as R5.10 lakh crore this fiscal. The central argument for creating a separate debt management agency is that in cases where central banks which are to primarily function as monetary authorities also manage government debt, it leads to a conflict of interest.

A central bank managing government debt is perceived to be biased towards a low interest regime for reducing costs of sovereign debt even if it compromises its anti-inflation stance.

The conflict may also distort the open market operations of the central bank.

The RBI Act currently mandates the Reserve Bank to be the debt manager of the central government.

It also manages the debt of state governments by mutual agreement as provided in law.

Last May, RBI governor D Subbarao had argued against a separation of government debt management from the central bank, labelling it as a sub-optimal choice. Subbarao had highlighted several points which require debt management to remain within the ambit of the central bank.

Only central banks have the requisite market pulse and instruments to aid in making contextual judgments which an independent debt agency, driven by narrow objectives, will not be able to do, Subbarao had said.

A joint implementation committee, comprising of the RBI and finance ministry officials, is currently overseeing the preparatory work for the agency.

As a prelude to the debt management agency, the finance ministry has already set up a middle office to carry out research and some other functions relating to the government debt. The middle office is proposed to the merged with the debt management agency when it comes into shape.