Ahead of Urjit Patel taking over as the new Governor, Reserve Bank employee unions have appealed to Parliament members and state finance ministers to prevent the proposed Public Debt Management Agency (PDMA), saying that moving the function will cost the government dearly.
“Holding of government securities by the central bank in a developing economy is always advantageous. The argument for separation of public debt management from the RBI is hardly relevant in our context,” says the letter written last week.
The letter, written by the All-India Reserve Bank Employees Association, All-India Reserve Bank Workers Federation, All-India Reserve Bank Officers Association and the Reserve Bank of India Officers Association, has been addressed to MPs across party lines as well as to the states’ finance ministers.
Finance Minister Arun Jaitely in the 2016 Budget proposed to divest the public debt management functions from the RBI by setting up a separate body under the finance ministry as an autonomous agency “to bring both the country’s external borrowings and domestic debt under one roof”.
But following opposition from the RBI, he dropped the proposal from the 2016 Finance Bill. The minister, however, said the government, in consultation with RBI, will prepare a road map to pursue a separate debt management agency later, in line with the global practices. The PDMA will act as an investment banker to the government and will raise capital through bonds. At present, the RBI is handling the government’s borrowing programme and setting up of PDMA requires amendments to the RBI Act.
Currently, RBI fully handles issuance (front-office) and infrastructure (back-office) of G-secs. The middle office, which is currently with the finance ministry, handles formulation of a long-term debt management strategy, annual debt issuance and periodic calendars of borrowing, forecasting cash and borrowing requirements. It also lays down a comprehensive risk management framework. The letter says when foreign investors want to invest large-scale in the country, they have to purchase huge amount of rupee bonds to buy domestic assets.
Consequently, the rupee appreciates and makes exports costly, and to offset this the RBI has to intervene and suck out excess foreign currencies from the market. This maintains the exchange value of the rupee but increases its supply in the domestic market, triggering inflation, argues the letter. “The RBI sells government securities which it holds in its reserves and abates excess rupee supply from the market. This exercise warrants RBI having huge stock of government securities,” it says. Under such arrangement, the RBI at a time can manage public debt, maintain the exchange rate, the unions write. “In today’s world of financial insecurity the much chased financial stability can only come from a well co-ordinated monetary policy exercise, exchange rate control and public debt management which precisely the RBI is doing most efficiently and for which it is recognised the world over,” argues the letter.
The RBI acts as the depository of around Rs 40 trillion government securities. “The government will have to incur huge costs if such enormous amount of securities is transferred to NSDL (National Securities Depository) or Sebi, as the RBI do not charge anything for its depository function, while NSDL or any other agency will, as these are profit-oriented companies,” the unions claim. The proposed PDMA will only look after the central government’s borrowing but totally silent about the borrowing programmes of the states. “When the RBI is divested of management of central government debt, it becomes impossible for it do that for the states, since issuance and servicing of state securities by the RBI is based on the tranche, periodicity, maturity patterns, interest rates of the central government securities,” the letter reads.
Moreover, the states’ access to revenue through taxation is very limited and they need to raise funds for conducting its developmental activities. “Public debt is the universally accepted practice to meet that end. The RBI has hitherto worked as the main support to the states in raising their debt and its role as the guarantor provides investors the necessary confidence to subscribe the state loans,” says the letter.
It further says at time of financial strains, states can approach the RBI which as the banker of states can issue overdraft that makes investors assured of repayments. “Such guarantee will be lacking once the PDMA takes over,” the letter claims.