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K.R.Srivats

New Delhi, Jan. 5 An autonomous debt management office (DMO) to manage the country’s public debt may not come into being for the next few years.

There is now a strong view amongst policy makers that time is not yet ripe for the complete separation of debt management from the Reserve Bank of India (RBI). But they are not averse to a well structured middle office that could help debt management as a whole.

The latest to lend its voice on the matter is the Committee on Financial Sector Assessment (CFSA), which has strongly endorsed setting up of a middle office as the DMO within the Ministry of Finance.

Stating that this middle office should be acting in consultation with the Finance Ministry, the CFSA is set to suggest that the RBI should act as an agent of the proposed middle office. Moreover, it should be ensured that there should be close coordination and continuous flow of information between RBI and the middle office.

The erstwhile Finance Minister, Mr P. Chidambaram, had, in his 2007-08 budget speech, proposed setting up of an autonomous DMO.

He had also announced that in the first phase a middle office would be set up as a prelude to a separate full-fledged DMO.

For furthering the functional independence of the RBI, an advisory panel to the CFSA had recommended that the debt management office, as announced in budget 2007-08, should be set up as a statute-based entity.

Currently, the RBI acts as the debt manager of the Central Government. It also does debt management for the States through agreements.

Over the last decade, the issue of conflict between the debt management and monetary management functions of the central bank had received considerable attention.

The general case for separation of debt management from the monetary authority was essentially premised on the perception of conflict of interest between monetary policy and debt management on account of the possible conflicting pressures on the direction of interest rates.

Although various groups set up by the RBI since 1997 recommended separation of debt management from monetary management function and hiving off debt management function to an independent entity, there has been no unanimity or convergence of views in this regard.

An internal working group on debt management, set up by the Union Finance Ministry, had noted in its report submitted last year that having the central bank manage public debt generated a series of conflicts that had negative effect on economic and financial policy.

“There is a severe conflict of interest between setting the short term interest rate (i.e. task of monetary policy) and selling bonds for the government. If the central bank tries to be an effective debt manager, it would lean towards selling bonds at high prices, i.e. keeping interest rates low. This leads to an inflationary bias on monetary policy”, the working group report had said.

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