The monetary authority of the country should be the sole entity to manage the huge public debt of the Central Government. This will ensure that the interest rate structure in the economy does not go awry, said a Reserve Bank of India trade union.
Referring to the proposed separation of the management of the Central Government's public debt from the RBI, the All India RBI Employees Association said the States will also be advised to follow suit.
Rate war
If States, like the Centre, have their own debt management office (DMO), then bereft of the RBI's coverage and guarantee, the financially weaker States may find it difficult to sell their debt papers, cautioned Mr Samir Ghosh, General Secretary of the Association.
“An unseemly rate war amongst the States may ensue, vitally affecting the weaker States,” said Mr Ghosh.
In an extreme situation, the RBI, as the banker to the State Governments and as a lender of last resort, may come to the rescue of defaulting States in the matter of public debt. However, this RBI accommodation may not be available once the DMO system comes into force, the Association said in a statement.
The Association has buttressed its argument by stating that countries such as Denmark and Iceland, which were in difficulty due to the Euro zone crisis, have chosen to revert to the central bank for managing their public debt.
“Sensitive issues such as separation of the management of Central Government's public debt from the RBI should not be hustled through by the Government without wider consultation and a national consensus,” explained Mr Ghosh.
He emphasised that the RBI is an autonomous institution and there is continuity in its functioning. However, this is not the case with Governments.
The Government is planning to introduce a legislation in the upcoming Budget session to de-link the management of Central and State Government debt from the RBI.