The Hindu Business Line : Debt management office to be set up

The implications
May be modelled on British counterpart to raise debt for Govt.
One step closer to capital account convertibility, say bankers.
May lead to more FII participation in debt markets.

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Bangalore Feb. 28 The Finance Minister's Mr P. Chidambaram's budgetary proposal for setting up a debt management office is in line with the recommendations of the Advisory Group of the Reserve Bank of India on Transparency in Monetary and Financial Policy in September 2000.

The group had then suggested separation of the public debt management and monetary policy functions of the central bank in a phased manner and when fiscal consolidation objectives were attained. With the revised estimates on the fiscal deficit at 3.7 per cent of the gross domestic product and 3.3 per cent targeted for the next financial year, the Government has become confident of separating the debt office.

Currently, public debt management is done through RBI's public debt office.

The guidelines for setting up a separate debt management office have not been issued. However, Vijaya Bank's Chairman and Managing Director, Mr Prakash P. Mallya, said "It will be somewhat similar to the DMO in United Kingdom."

UK's DMO, set up in 1998, is an autonomous entity under the Chancellor Exchequer. The UK DMO is vested with the responsibility of British government's cash management.

Besides raising debt for the Government, the British DMO also raises funds for local bodies and urban development authorities in that country.

The principles of functions of the country's debt management office are also expected to be somewhat similar. This office is expected to be vested with the responsibility for raising debt for the Union Government, both short and long-term. This is also expected to include Treasury bills.

Grey areas

But the grey area is the issuance of securities under the Market Stabilisation Scheme and intervention in the markets for sterilisation of excess liquidity, created through foreign exchange inflows.

But bankers said that the Finance Minister's move was one step closer to capital account convertibility. The DMO is also likely to be become an active participant in the money and debt markets providing much-needed depth and impart greater liquidity for infusing confidence to foreign institutional investors that have, so far, remained shy of the debt markets in the country.

FIIs, despite being permitted, have remained at the short end of the markets and have completely stayed away from sub-sovereign and corporate debt markets.