Debt management office likely

BUDGET & MONEY

PUBLIC DEBT:The move to separate the public debt management and monetary operations of the RBI stemmed from the conflicts involved in managing the two tasks.

The government has finally taken the first step towards creating an autonomous public debt management office, as part of transition to separate monetary policy and public debt management.

The government was encouraged to take the initial step by the fiscal consolidation achieved so far. The government has proposed to set up an autonomous debt management office (DMO) and to begin with, a middle office would be set up to facilitate the transition to a full-fledged DMO.

The Reserve Bank of India (RBI) had stopped participating in the primary issues of government bonds from April 1, 2006, and constituted Financial Markets Department in July 2005, with a view to moving towards functional separation between debt management and monetary operations.

The RBI has also introduced a revised scheme for underwriting commitment at auctions of government bonds and liquidity support to primary dealers (PDs) with effect from April 1, 2006. The revised scheme requires PDs, merchant bankers to the government, to meet an underwriting commitment, replacing the earlier requirement of bidding commitment and voluntary underwriting.

The move to separate the public debt management and monetary operations of the RBI stemmed from the conflicts involved in managing the two tasks. As a debt manager, the RBI wishes to minimise the cost of raising debt and would thus pick up large amounts of government securities to avoid creating interest rate 'spikes', which may have spill-over effects on inflationary expectations.

Recognising this, the RBI had set up a working group on separation of debt management from monetary management, which recommended, inter alia, separation of debt management from monetary management and establishment of an independent company under Companies Act, 1956, to take over the debt management function. It was felt that the separation of the two functions would be dependent on the fulfillment of three preconditions "" development of financial markets, reasonable control over fiscal deficit and necessary legislative changes.