Parliamentary panel to talk divesting RBI of debt management role

Experts say not a good idea when the country is recovering from the Covid crisis

Amid the pandemic and record borrowing spree by the central government, the Parliamentary Standing Committee on Finance is visiting the Reserve Bank of India (RBI) headquarters on Saturday to discuss, among other things, separation of the debt management function from the RBI, sources said.   

Jayant Sinha, chairman of the committee, and former prime minister Manmohan Singh, who also served as governor of RBI from 1982 to 1985, would be among the members present at the meeting.

To be sure, the committee can only give their recommendations, which are not binding on the government. But considering the committee comprises distinguished members from all parties — both from the government and the Opposition - the recommendations are expected to be taken with seriousness.

Separation of debt management is not a new idea, and the government has already set up a Public Debt Management Cell as an interim arrangement before setting up an independent and statutory debt management agency, namely the Public Debt Management Agency (PDMA).  

But experts say this may not be a good time to discuss the separation of debt management powers from the RBI. Even respected names in policymaking have warned against affecting the RBI’s ability to manage debt for the government at the present juncture, when the country is trying to recover from the Covid-19 crisis and the RBI is keeping borrowing costs low for companies to borrow cheaply.  

N K Singh, chairman of the 15th Finance Commission, warned against any such move at a recent Business Standard function.

“This is not the opportune time to settle a debate over the setting up of an independent debt office since there is enhanced borrowing plan for the current fiscal year and the yields of government papers are also supposed to be kept within the tolerance level,” Singh had said.   

The Centre borrowed nearly Rs 13 trillion from the market in 2020-21 and plans to borrow more than Rs 12 trillion in the current fiscal year (2021-22). The RBI, as debt manager to the government, managed that smoothly at a 16-year low cost. The RBI also managed a near equal amount of borrowing for states in a non-disruptive manner.   

The central bank kept the markets stable, despite huge borrowing through various conventional and unconventional means, and by actively managing system liquidity.  

“The RBI - as debt manager to the government - is committed to ensuring non-disruptive implementation of the borrowing programme at the lowest possible cost. Our efforts are in that direction,” RBI Governor Shaktikanta Das told Business Standard in an interview in July.   

In the long run, experts say there is no reason why debt management should stay with the RBI.

“Over time, there is merit in the separation of merchant banking and the conduct of monetary management since that eliminates any hint of conflict of interest and enhances credibility all around. Of course, debt merchant banking is a specialised activity, and any independent PDMA has to have the requisite skills and experience” said Ananth Narayan, senior analyst at Observatory Group.

“Even if separation was to happen, the RBI would naturally continue to operate in the bond markets for conduct of its monetary and liquidity operations,” said Narayan, adding, "While there is need for better regulatory coordination across the government bond and corporate bond markets, there is no merit in stripping the RBI of its regulatory powers around government bond markets."

A 2019 study by the Bank for International Settlements found that the government securities (G-Secs) market in India, measured in terms of outstanding stock as a per cent of gross domestic product, is large, relative to most Asian peers, and the bid-ask spreads are among the best.  

Das in his speech earlier this week acknowledged that there are gaps to be filled, new products to be introduced, and investor base to be further widened.  

But he also maintained that the central bank’s “multi-faceted role as monetary policy authority, manager of systemic liquidity, government debt manager, regulator of interest rate and foreign exchange (forex) markets, regulator of payment and settlement systems, and overseer of financial stability makes the G-Sec market critical for the effective discharge of these responsibilities”.  

According to a senior market expert, there is a need to simplify securities law in India, and therefore, a uniform securities market code is a welcome step.  

“However, while consolidating the Acts, it needs to be ensured that the present systems, especially those about G-Secs, built over the years with several enhancements to suit domestic conditions, are not subject to disruptions," he said, adding, “The markets which are critical to ensuring financial stability of the country, such as money, forex, G-Secs, and credit markets, should be under the regulatory/supervisory jurisdiction of the RBI. In the interest of smooth functioning of these markets, it would not be advisable to dilute the powers vested with the RBI." 

There is also rising demand to separate the secondary market trading from RBI controls, despite the infrastructure of the G-Sec market in India qualifying to be “regarded as cutting-edge in terms of sophistication”, Das had described in his speech.  

The Securities and Exchange Board of India Chairman Ajay Tyagi has time and again raised the need to unify G-Secs and corporate bond markets, citing interlinkages.  

“A unified market would enable trading of G-Secs on the same platform as corporate bonds, thereby utilising common infrastructure for trading, clearing, settlement, and holding of securities,” Tyagi had said in February. 

However, experts believe that the existing trading system is stable and efficient, and therefore, should not be tampered with.