RBI against setting up of separate debt management office

The Reserve Bank today opined against setting up a separate entity -- Debt Management Office (DMO) -- to manage the sovereign debt of the government, saying only the central bank has the requisite expertise to manage market volatility.

"Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do," RBI Governor D Subbarao said at a meeting of the Central Bank Governance Group in Basel.

The government is in the process of setting up of an independent Debt Management Office, aimed at separating RBI's role as the decider of interest rate in the market, and at the same time being the banker to the government.

At present, both the government's debt and fresh borrowings are managed by the central bank.

The Governor further said that in order to achieve monetary and financial stability, separation of debt management from central bank seems to be a "sub-optimal choice".

Finance minister Pranab Mukherjee in his 2011-12 budget speech had said that he proposed to introduce the Public Debt Management Agency of India Bill in the next financial year.

"The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. These advantages are overstated," Subbarao said.

He said market borrowings are the major source of deficit financing at state level and such borrowings are exceeding the absorptive capacity of the market.

"That makes it imperative to harmonise the market borrowing programmes of the Centre and the states. Separation of the Centre's debt management from the central bank will make such harmonisation difficult," Subbarao added.

He said even internationally, there is closer association between the central bank with sovereign debt management for proper monetary policy and financial stability.