Debt Management and Monetary Policy in India

The discourse on the need to separate debt management and monetary policy is doing rounds for quite a time. The view was even endorsed by the committee on capital account convertibility in 1996 because of the possible conflict of interest between monetary policy and debt management.

Why the issue went to backburner?

When Bimal Jalan took over as the governor of RBI after the Asian financial crisis, this dominant belief shifted against the separation of the functions of debt management and monetary policy due to the following reasons:

• Large fiscal deficits meant that the government borrowing programme did impinge on monetary policy, liquidity and the cost of credit for the private sector.
• Higher costs did not deter governments from borrowing more.
• Foreign exchange market volatility had implications for debt management.
• There are also conflicts of interest between government as owner of banks and issuer of debt.

But post the recession in 2008 the call for separation of debt management and monetary policy gained traction.

Public Debt Management Agency (PDMA)

Both the UPA and the NDA governments were in favour of setting up a separate debt management agency. Then Finance Minister Arun Jaitley in his 2015 budget speech, proposed to set up a PDMA for the management of both India’s external borrowings and domestic debt under one roof.

The Finance Bill, 2015 even laid out the contours of the PDMA. It envisaged to set up PDMA as a body corporate with a separate board, consisting of executive and nominee members appointed by the Central government.

Recent Developments

In the ongoing monsoon session, the government has withdrawn certain clauses from the Finance Bill on the setting up of the PDMA. The Ministry of Finance along with the RBI will now draw up a “detailed roadmap” for the setting up of the agency, which will be separated from the RBI to prevent conflicts of interest, as RBI is both the regulator and a dealer in government securities.

Why there are calls for a relook into complete separation?

• Irrespective of PDMA being a separate agency given the size of the borrowing programme and the stage of development of markets, the RBI and the ministry of finance will need to work in close coordination. Hence it must be kept in mind to not to bundle up PDMA with compulsions which may not be sustainable in the longer run.
• PDMA, as envisaged under the Finance Bill 2015, sought to completely revoke the powers of the RBI to regulate the market in government securities and any derivative based on these securities. Since the trading of securities is done in exchanges, RBI in association with SEBI regulates the market concurrently. Complete separation could have resulted in RBI’s monetary operations through repos and reverse repos could have come under the purview of SEBI.

The attempts by the Finance Minister for indicating that the government will work with the RBI on a well thought out roadmap for the PDMA is seen as a pragmatic approach.