Keen to avoid a stand-off with the Reserve Bank of India, the government is likely to set up a “shell” public debt management agency (PDMA) soon but would defer giving it legislative backing for full-fledged operations till a consensus is reached with the central bank on the structure of the proposed agency.
The RBI is said to be against transfer of back-office functions (trading platform, database) even though it is fully in agreement with the government on vesting the proposed PDMA with advisory (middle office) and the job of issuance of government securities (front office function).
According to official sources, the finance ministry, which was planning to bring a Bill in the winter session of Parliament to set up both the PDMA and a Monetary Policy Committee (MPC) that would set interest rates, has now decided to make the Bill a vehicle for the introducing the MPC only. However, a shell PDMA would be set up through an executive order in a couple of months. A cabinet note with these suggestions are now being discussed among concerned ministries and the RBI, the sources added.
Setting up of the MPC would fulfill a Budget promise. The government and the RBI signed a Monetary Policy Framework Agreement earlier this year formally mandating the central bank to adopt flexible inflation targeting. In the present system, the RBI governor is practically the sole decision-maker as far as interest rates are concerned, although advice from the government is heeded. Though the details of the Bill is not out yet, it is believed that as per a consensus reached between the government and the RBI, the latter will form half of the MPC, with the governor having a casting vote. RBI governor Raghuram Rajan had said that he was in not favour of veto power to the governor in the MPC.
While the executive order route would be used to create shell PDMA, the finance ministry will later opt for legislative changes to empower the body, sources said. In the meantime, shell PDMA will acquire the requisite skills by undertaking dummy trading in securities, working on new systems for primary issuance. It may hire staff from RBI as well as from the private sector. It would also be tasked to consolidate government debt data which is now scattered over RBI and several government agencies. There is also the option of the PDMA outsourcing the back office functions to the RBI, sources indicated.
The creation of the PDMA, it is reckoned, would enable RBI to focus on its core function of monetary policy and regulating banks. Such an agency is also expected to lower the government’s borrowing costs eventually and foster a liquid and efficient G-Secs market. The idea is also to resolve the conflict of interests involved in RBI simultaneously targeting inflation by calibrating interest rates and regulating as well as managing government debt.
After an year or so, the sources said, the PDMA would be handed over the middle and front office functions. The PDMA was announced in the Budget presented in Parliament in February 2015, but finance minister Arun Jaitley had to defer the plan to amend the RBI Act through the Finance Bill to set up the PDMA, as RBI opposed the transfer of the back office.