The Reserve Bank of India (RBI) seems unwilling to give up the management of Government of India’s (GOI) debt. To the uninitiated this may seem like a protracted power struggle between the government and the RBI. However, in reality the government’s policy move to transfer its debt management to an independent Public Debt Management Agency (PDMA) was a policy decision endorsed by the RBI’s own board as early as 2002.
Creating a debt management authority will result in eliminating the RBI’s role of managing cash and borrowings of the government. Experts say that this will remove the conflict of interest, which is created because of RBI’s triple roles: investment banker to the GOI, banking regulator and that of a monetary policy manager. This conflict of interest arises primarily because the RBI as a debt manager is likely to try and minimise borrowing costs, while at the same time such a stance could interfere with its monetary policy management function. Without an iota of doubt, this is a watershed institutional reform. For one it is keeping in line with a worldwide trend, especially in emerging markets, which have established an agency of such a nature.
Much more importantly there seems to be a consensus amongst economists that India needs to raise a whopping $1 trillion to fuel its frenetic infrastructure building. This can only come from bond funding. Creating a separate debt management authority would help remove the extensive financial repression in the bond markets and also aid them widen their portfolio of investors.
This move will also be beneficial because it makes the Central Bank relatively independent by helping it focus on a clear cut mandate which is inflation targeting. With this mandate, the RBI can focus solely on keeping inflation low and thus perform its role as a monetary policy manager and banking regulator better. Such a move would also force the government to take the role of fiscal consolidation more seriously. With the RBI freed from the onerous role of debt management the Indian economy would no longer have to bear the brunt of irregular bond pricing. RBI Governor Raghuram Rajan has however sounded a note of caution.
In an interview he pointed out that having an independent public debt management agency does not eliminate conflicts of interests entirely. This is because the government still has a stake in Public Sector Entities, Public Sector Banks and Life Insurance Corporation of India. He warned that such an agency should not be powerful enough to force public debt onto any of these entities. He also said that “an entity, which is purely professional, not a huge bureaucracy but which manages and designs the placement of Government debt” is ideally desirable.