Separation of debt and monetary management in India

Abstract

The discussion highlights the importance of and the need for a separate debt management office, separate from the monetary authority. The objective of debt management is raising resources from the market at minimum cost while containing the risks, while that of the monetary authority is to achieve price stability. In the years preceding the financial crisis of 2008, separation of debt and monetary management was a settled norm and a number of countries with liberalized financial markets and high levels of government debt sought to adopt professional debt management techniques to save cost and to provide policy signals to the market. Separation of debt management is essential to preserve the integrity and independence of the central bank, to ensure transparency and accountability, and to improve debt management by entrusting it to portfolio managers with expertise in modern risk management techniques. In India, debt is managed by the central and state governments, and the RBI. The separation of debt management would provide focus to the task of asset-liability management of government liabilities, undertake risk analysis and also help the government to prioritize public expenditure through higher awareness of interest costs. The separation would also be helpful for the borrowing programme which would have to be completed without the support of the regulatory or supervisory authority. This may lead to widening of investor base and market friendly yield curve.

But after the great financial recession of 2008, the issue has re-emerged as in many countries, especially the advanced economies, the scope of fiscal operations was expanded, and the debt to GDP ratios have increased substantially. Similarly, in view of the sensitiveness of the issue, especially amidst less developed financial markets, there has been some re-thinking on the issue; in India, the Reserve Bank has also been re-thinking the separation issue and seems reluctant given the present context of the economy.