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The Reserve Bank of India (RBI) says taking out its debt management cell to form a separate body could compromise the effectiveness of monetary policy.
"There is a strong case for continuance of the present system of the central bank managing (government) debt," said Deputy Governor H R Khan earlier this week in Bangalore.
He said the significant impact of government borrowing on the broader interest rate structure and, therefore, on the monetary transmission process in financial markets makes it a critical component of macroeconomic management. In such a scenario, central bank involvement in managing the market volatility and market expectations arising out of government debt borrowing becomes necessary.
The government plans to set up a debt management office, independent of RBI, to effectively manage its debt obligations.
"The past experience, reinforced by the recent developments regarding huge market borrowing of the government, has shown the necessity of this approach. Such will be the case even if the central bank is disassociated from the operational aspects of debt issuance. This being so, it is much better for the central bank to have a hands-on involvement," Khan said.
