RBI voices concerns on separation of DMO from Central Bank

The Reserve Bank of India (RBI) has once again voiced concerns on separation of Debt Management Office (DMO) from Central Bank. “Separation of debt management from Central Bank needs to be revisited in the wake of global financial crises,” said H R Khan, deputy governor, RBI at a conference in Doha recently.

Earlier, the government had proposed that DMO is expected to be independent under the finance ministry’s purview. This would be responsible for managing the government's borrowing programme. The separation of DMO from Central Bank had gained importance over the last few years as the government's market borrowings had increased and was being managed by the RBI. RBI was putting in much effort in the exercise.

However, RBI governor D Subbarao had mentioned that there is no conflict of interest between the debt management and the Central Bank. According to him only the Central Bank had the requisite market pulse and instruments which will help in making contextual judgments. According to him and independent debt agency, driven by narrow objectives would not be able to do this.

In fact Subbarao was of the opinion that the advantages of shifting debt management function out of the central bank are overstated. The advantages pointed out were higher transparency, helping in debt consolidations, lowering cost of debt and resolving conflict of interest.

According to Subbarao these advantages may be valid in few nations, but when it comes to India where the government borrowings are large, sovereign debt management was beyond merely an exercise in resource raising.

Khan also highlighted the importance of state. “For development of deep, efficient and resilient debt market each country has to focus on the role and responsibility of state keeping in view significance of debt market, in particular government bonds market in overall economic development of the economy and the financial system even if a country had budget surplus,” said Khan.

According to Khan there is also a need to keep in view credible and efficient debt management strategy and framework within the overall macroeconomic policy environment, strategy for deeper, wider and resilient debt market, safe and robust financial market infrastructure. Besides this there should be effective regulatory and supervisory framework focusing on financial stability, market integrity, transparency and consumer protection, said Khan.

According to Khan there may be confluence of interest between monetary policy and debt management in India.