The finance ministry has proposed a transitional road map for complete transfer of the management of public debt from the central bank to the proposed independent Public Debt Management Agency (PDMA) by the end of FY19.

A high level meeting between the ministry and RBI officials has been convened on June 30 to discuss and finalise the road map, which includes phased transfer of the front, middle and back-office functions to the PDMA.

The government is keen to sort out all issues with the RBI, which is now performing the seemingly contradictory roles of inflation targeting through interest rates and regulating as well as managing government debt, before bringing in a Bill to amend the RBI Act in 2016 to set up the PDMA as a statutory body. The idea is to complete the transfer in the tenure of the current NDA government.

While withdrawing proposals from the Finance Bill 2015 to set up PDMA and transfer government debt regulation to the Securities and Exchange Board of India, finance minister Arun Jaitley had committed to Parliament in May that a road map would be prepared in consultation with the RBI to separate the debt management role from the central bank. The government had to rescind Budget proposals due to the concerns raised by RBI.

Both these measures were based on the recommendation of the Financial Sector Legislative Reforms Commission, which suggested restructuring existing regulatory agencies and creating new agencies wherever needed for better governance and accountability.

Currently, RBI fully handles issuance (front-office) and infrastructure (back-office) of G-secs. As per the finance ministry’s proposal, the middle office would be fully transferred to the PDMA in FY17.

The middle office, that would give advice to the government on debt management, composition of debt and formulate debt issuance strategy, is now scattered over RBI and several government agencies  (the part of the middle office located at the finance ministry now is manned by just two officers from RBI).

While RBI handles government securities, the Aid, Accounts and Audits Division advise on external debt while the postal department advises on small savings. All these would be put together in the middle office under PDMA to advise and give a better picture of full government debt and contingent liabilities, which is not the case now. The front office, which manages the government debt issuance part, would be shifted in the second year (FY18). The  back-office (infrastructure) of government securities market would be transferred in FY19 after the first two  — front and middle offices — stabilise operations. The RBI is likely to give a formal response to all these proposals at the June 30 meeting.

The government is heavily reliant on cooperation from the RBI on the transition roadmap as it would require moving RBI staff with expertise in government debt management to PDMA as well as the technology and infrastructure.

While a part of the PDMA would be housed in New Delhi to liaison with the government, a major part of it would be located in Mumbai.

Highlights
* Finance ministry proposes a road map to set up an independent Public Debt Management Agency by the end of FY19
* A middle office would be set up under PDMA in (FY17) to take over advisory roles on govt debt from RBI and govt agencies
* A high-level meeting between the ministry and RBI would be held on June 30 to finalise the road map; legislative changes to set up PDMA likely in 2016

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