No harm in govt managing its own debt: Rangarajan

Dr C Rangarajan, Chairman, Prime Minister's Economic Advisory Council, said on Tuesday that he saw “no harm” in government taking over the management of public debt, but at the appropriate time.

“It is the responsibility of the government and the government might as well do it,” Dr Rangarajan said, but hastened to add that if the public debt management function is taken away from the Reserve Bank of India “prematurely”, it would not be wise.

Dr Rangarajan was responding to a question after his lecture on ‘Economic Growth and Inflation', organised by the Indian Overseas Bank, as to whether the RBI's role as the debt manager of the government of India interfered in the transmission of its monetary policies into the desired effect.

(There is a view that the RBI's role as government of India's debt manager — it issues bonds and manages them on behalf of the government — gets in the way of its efforts to tackle inflation. This is because, according to the proponents of the view, it is in the RBI's interest to keep interest rates under check so that government does not end up paying a high interest, but on the other hand, its monetary policy measures of raising repo rates has to translate into higher interest rates in the economy, to check inflation. Some experts see a conflict of interest here.)

In his response to this question, Dr Rangarajan noted that the question had been debated in many countries. While in many countries governments raise their own debt and manage it, in certain other countries (such as India) the management of public debt has been with the central bank.

“To me, it is a matter of convenience,” he said, stressing that at least two major steps had been taken to ensure that there was no conflict of interest between the RBI's twin roles as the monetary authority and manager of government's debt. First, in 1996, the ad hoc treasury bills were abolished. Prior to that, government would simply raise the bills in favour of the RBI, which would print currency notes and pay the government. That is now gone. Second, under the Fiscal Responsibility and Budget Management Act, “the RBI is not allowed to be in the primary market” — i.e., it cannot buy government's bonds.

With these two measures, the RBI is insulated from being influenced by its role as government's debt manager, Dr Rangarajan said.

Later, on the sidelines of the function, when asked if RBI's raising of interest rates had actually helped tame inflation, Dr Rangarajan said, “yes, it has. You see, inflation will come down.”

In his speech he said that inflation might be expected to come down to 6.5 per cent by March 2012.

COMMENT NOW