Govt plans greater role in RBI's debt mkt operations

Middle office to actively advise RBI on weekly borrowings

The finance ministry is likely to strengthen its debt management arm, known as the middle office, by giving it greater say in the Reserve Bank of India’s decisions on issuance of government bonds, treasury bills (T-bills) and open market operations.

Such a move would also mean the proposal for a Public Debt Management Agency (PDMA), as envisaged last year, and involving taking away  RBI’s powers to issue government securities (G-Secs) and to regulate the G-Sec market, is dead.

In the present arrangement, the front office, which issues bonds and T-bills, and the back office, which handles the infrastructure, are with RBI. The middle office, monitoring debt issuance and markets, is part of the Budget division of the ministry.

GOAL SETTING
Govt and RBI are said to have reviewed 5-year inflation target

• Target to be notified soon, possibly this week
   
• Originally stated target of 4% (+/-2%) could be maintained
   
• Govt had notified MPC formation in late June
   
• 5-year inflation target not been notified yet

Officials from the ministry and RBI draw up a borrowing calender twice a year to outline the weekly schedule of issuance of government bonds. However, it is the front office which decides when to issue G-Secs and whether to hold issuances or buy and sell in the secondary market, depending on liquidity and market conditions.

That is to change, government sources told this newspaper. “The ministry may actively advise the RBI on debt market operations on a weekly basis. The decision on whether to issue additional G-secs, cancel an issuance or the weekly amount worth of debt to be issued will be jointly taken by RBI and government,” said an official.

This will include streamlining the middle office’s operations and perhaps increasing its personnel. “The ministry’s official role in debt issuances will now go beyond the two borrowing calender meetings,” the official said.

Another official said discussions on the proposal's final contours were still being discussed with RBI and clear announcement was to be made in the coming weeks. The central bank is said to be comfortable with what is planned.

The proposal for a PDMA, as envisaged in Finance Bill 2015, included taking away the power of G-Sec regulation from RBI to the Securities and Exchange Board of India, and shifting the front office, middle office and back office to the PDMA. Finance Minister Arun Jaitley had removed these contentious provisions and put Public Debt Management Agency on a back burner amid an intense debate on the government trying to take away RBI’s powers.

There have been lengthy discussions with RBI since then. This proposal, to give more powers to the middle office, is seen as the one all stakeholders are comfortable with.

For April-September, first six months of this financial year, the government will borrow Rs 3.55 lakh crore or 59.2 per cent of the total borrowing requirement. This is in line with the standard practice to front-load borrowings in the first half of the year, so that the second half remains relatively free for the private sector to borrow. The Union Budget had estimated the total borrowing at Rs 6 lakh crore. Net of redemptions, the borrowing was pegged at Rs 4.2 lakh crore.