RBI governor D Subbarao?s statement on Monday against an independent profile for the debt management office (DMO) has surprised finance ministry officials. The draft legislation to set up the office as an autonomous institution is already with the law ministry for vetting, though there is no decision yet on when it should be tabled in Parliament.
A source familiar with the developments said the RBI was involved at every stage of the plan for the DMO. ?They have made their observations to the government in the course of the discussions.? The RBI, it is understood, has expressed its reservation, but ?the government of India has made a decision?. Mandarins are accordingly puzzled the governor chose to go public on the issue when it was apparently sorted out. However, they refused to speculate on the development as a possible incipient turf war between the heads of monetary and fiscal policies in India.
In Budget 2011-12, finance minister Pranab Mukherjee said he would introduce the debt management office Bill to handle the issuance of public debt. The RBI opposition could unsettle this promise as the standing committee on finance in the legislature could decide to stonewall the Bill in view of the differences. The DMO plan was first floated in Budget 2007-08, but got delayed over differences between the RBI and the finance ministry on the need for such an office. It was revived by Mukherjee. Once the Act is in place, the management of public debt including the floating of all government papers will be handled by the office. It will manage the registration of primary dealers and take a call on the types of papers the government should float in the debt market. When the Centre decides to float India?s debt papers abroad, the DMO will be very useful, say experts. It is expected that state government loans will also be eventually managed by the DMO. However, the government has given up its nascent plan to make the DMO a public sector entity to ensure greater control over its functioning. Rajiv Kumar, director-general of Ficci and eminent economist said he disagreed with Subbarao?s take on the DMO.
?It will optimise the performance of the debt portfolio of the government and minimise costs. The DMO is a promising idea that needs to be pushed,? he said. Government experts who have worked on the plan said the DMO will not harm the sovereign right of the finance ministry to set the quantum of market borrowing for the year in consultation with the RBI. Also, the borrowing calendar for the year, which is now issued with a six-month horizon, will also include RBI inputs. Since the draft of the Bill also envisages an RBI nominee in the board of directors of the new institution, the opposition from the central bank was difficult to understand, they said. Subbarao will, however, enjoy the support of state governments which feel the DMO will make them even more reliant on the Union finance ministry, at a time when they have to depend on market borrowing to meet their needs.