There is merit in continuance of the present institutional arrangement whereby the Reserve Bank of India manages the public debt, according to Deputy Governor Harun R Khan.
In the context of the clamour in some quarters for an independent Debt Management Office (DMO), Khan said: “The size and dynamics of government market borrowing has a much wider influence on interest rate movements, systemic liquidity.
“An autonomous DMO, driven by specific objectives exclusively focusing on debt management alone, may not be able to manage this complex task involving various trade-offs.”
Given the persistently large size of the market borrowings, there is a strong case for confluence of interest between monetary policy and debt management in India, said Khan in his keynote address at IIM-Bangalore.
On the other hand, Government’s ownership of majority stake in public sector banks (which own 70 per cent of banking sector assets) could be a source of conflict of interest with its role as debt manager, either directly or through an agency controlled by it, he added.
Sovereign debt management
Khan observed that in a situation of excess capital flows requiring forex intervention from the Reserve Bank and the consequent sterilisation through issuance of Government securities under the Market Stabilisation Scheme (MSS), the coordination of sovereign debt management (SDM) with these operations needs to continue.
“The significant impact of the Government borrowing on the broader interest rate structure in the economy and, therefore, on the monetary transmission process in financial markets, makes it a critical component of the macroeconomic management framework.
“In such a scenario, central bank involvement in managing the market volatility and market expectations arising out of government debt borrowing becomes necessary,” he said.
He felt that if at all, separation of debt management from central bank has to be effected, it should be preceded by a well-thought strategy focussing on perfect co-ordination among the Debt Management Office, the Ministry of Finance and the Reserve Bank of India.