Govt delays PDMA plan as RBI not willing to pull out as debt manager

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Updated: May 28, 2015 2:01:02 AM

The plan for an independent public debt management agency (PDMA) may remain in a limbo for next few years as RBI...

The plan for an independent public debt management agency (PDMA) may remain in a limbo for next few years as RBI is not willing to fully withdraw from its role as the public debt manager.

The central bank has insisted on keeping the back office with itself and transfer the front office of debt management to the PDMA, making the entire process of creating a modern debt management office futile, sources said.

Currently, RBI handles issuance, infrastructure and regulation of government securities. Last month, the government had to rescind Budget proposals to shift regulation of government securities from RBI to market regulator Sebi and  to create a PDMA, due to stiff opposition from RBI. Both these measures were based on the recommendation of the Financial Sector Legislative Reforms Commission to streamline regulation and move to a principle-based regulation from the present sectoral-regulation.

Sources said the finance ministry won’t accept the central bank proposal of splitting the government’s debt management role between the central bank and the proposed debt management agency. In fact, that was a reason why the government backed down from the Budget proposal to set up the PDMA. “If RBI does not agree to fully transfer the government debt management, we won’t do it,” a source with knowledge on the matter told FE.

Announcing  withdrawal of the proposal from the Finance Bill, finance minister Arun Jaitley had said, “Since the RBI has been handling public debt management, the government in consultation with RBI will prepare a detailed road map, separating the debt management function and the market infrastructure from RBI.” But, he did not announce a timeline.

The fear that a confrontation on the issue with RBI may lead to the central bank not cooperating on the transfer of the existing data and infrastructure of the government securities (back office) and cutting statutory liquidity ratio (SLR) for banks to zero sooner than it would have been, spooked the North Block.

Such RBI moves would have created a havoc in the government securities market and the economy. Banks hold government securities under mandatory SLR requirement and provide a cost-effective market for the papers. “We are the borrower, we do not want to mess up the system,” the source said. If RBI decides to reduce SLR to zero immediately, there won’t be any market for the government securities, which account for about 70% of GDP.

Similarly, a denial of data would mean that the government won’t know who owns these securities.

stepping back
* The govt wants a complete transfer of debt management role from RBI to PDMA
* RBI wants to retain office and hand over the front office to PDMA
* RBI’s firm stand on splitting the debt management role led to withdrawal of the PDMA provision from Finance Bill
* The government fears RBI won’t cooperate on transfer of data and infrastructure on G-secs

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