RBI raises red flag over separate debt office

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  1. anoop_mig25

    anoop_mig25 Senior Member Senior Member

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    RBI raises red flag over separate debt office
    Posted: Tue May 10 2011 Mumbai, New Delhi:
    The Reserve Bank of India on Monday opposed the setting up of a Debt Management Office (DMO) to manage the Centre’s borrowing programme on the grounds that only the central bank had the necessary market pulse and instruments to aid making contextual judgements. “An independent debt agency, driven by narrow objectives, will not be able to do (this),” said RBI Governor D Subbarao at a meeting of the Central Bank Governance Group in Basel.
    A little over two months back, finance minister Pranab Mukherjee had said in Budget 2011-12 that the Centre would introduce the Public Debt Management Agency of India Bill in 2011-12 to set up the DMO.

    Subbarao’s statement took the finance ministry by surprise. “Though the RBI never really favoured the DMO, this is the first we have heard from it on the issue. It has not communicated any such concerns to us,” a finance ministry official said.
    Conceptualised by former finance minister P Chidambaram in 2007, the DMO is expected to be an independent agency that would start with managing the Centre’s programme and gradually also do the same for states.

    But the RBI governor has clearly called for a review. “Taken together, the borrowing by states has attained a critical mass vis-a-vis the absorptive capacity of the market. That makes it imperative to harmonise the market borrowing programmes of the Centre and the states. Separation of the Centre’s debt management from the central bank will make such harmonisation difficult,” he said.

    As a pre-cursor to the DMO, the finance ministry has already set up a middle office, staffed with RBI officials, that is responsible for analysing and studying data on public debt.

    According to Subbarao separation of debt management from central bank would be a sub-optimal choice. “There is need to reconsider the content and pace of this process in view of the revised circumstances post-crisis. The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. These advantages are overstated,” he said.

    Even globally, the emerging post-crisis wisdom recognises the interdependence between the functions of monetary policy, financial stability and sovereign debt management and the need for close association of the central bank with sovereign debt management, Subbarao added.

    On the argument about a conflict of interest in the RBI’s inherent responsibility as the monetary authority, and its obligations as a debt manager, Subbarao said, “In countries such as India, given the large size of the borrowing programme, sovereign debt management is much more than merely an exercise in resource raising. It has a much wider influence on interest rate movements, systemic liquidity and even credit growth through the crowding out of private sector credit demand.”
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    can anybody tell whats the issue?
    what are best international practise followed by other countries
    what are advantages and disadvantages in setting up separate debt office by government .(both for government and as well as RBI)
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    i know only one thing that upa government from day 1 had tried to reduce independence of number of institution by hook or crook
     
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