Reddy For Separation Of Debt Function From Rbi

Reserve Bank of India (RBI) deputy governor Y V Reddy today reiterated the policy preference for separating debt management from the central bank.

"There is a general agreement that being the fiscal agent creates problems for the central bank and separation of the debt management function from the central bank would remove the friction," Reddy said in his keynote address at the Asian Bond Conference.

He added that in a situation of high fiscal deficit and lack of fiscal assurances on its (central bank's) responsibility, separation of monetary policy and debt management functions could increase the risk of macro instability. According to him, controlling the fisc, developing financial markets and putting in place institutional and technological infrastructure ideally should precede such separation.

Emphasising that separation of the debt and monetary management functions is a medium-term process, he pointed out that currently, almost all the central banks were harmoniously co-ordinating with the fisc, both at the policy and operational levels with regard to debt management.

"Of course, institutional arrangements for establishing a separate debt office need to be thought through. The federal nature of India adds another dimension to the issue -- should each state and central governments have a public debt office while replacing RBI? One method could be to set up an independent corporate entity structure to manage the debt of both centre and the states," said the deputy governor.

He pointed out that irrespective of whether the debt management function was vested with the central bank or not, co-ordination was important to avoid conflicts between cash and debt management of the government and central bank operations.

"The timing and amounts of the government securities issuance may not always coincide with the compulsions of the central bank's monetary policy. The government may wish to issue the securities at a time when the market is illiquid and the central bank needs to consider whether or not and to what extent it will provide additional liquidity," he said.

In such a case, liquidity could be provided through the secondary market or where the central bank is both the debt and monetary manager, it has the option to operate through the primary market, Reddy added.