FinMin to go ahead with DMO despite RBI protests

Reservations expressed by the Reserve Bank of India (RBI) notwithstanding, North Block, the finance ministry headquarters, is going ahead with its plans to set up a full-fledged Debt Management Office (DMO) to manage the government debt. The finance ministry has prepared a draft legislation on setting up a separate DMO and the Bill is likely to be tabled in the Winter Session of Parliament.

“The government will move towards a full-fledged DMO. The draft legislation has been prepared. Maybe the RBI governor has some genuine concerns which are being addressed in the design and structure of DMO. Now it will go to other stakeholders within the government,” said a finance ministry official.

Finance Minister Pranab Mukherjee has also been briefed on the draft legislation, but he is yet to see it formally. Once comments from all stakeholders are received, including RBI, the Bill will be sent to the law ministry. After it is vetted, it will go to the Cabinet for approval to be tabled in Parliament. Simultaneously, the finance ministry will start preparatory action on setting up DMO. The ministry is seeking cooperation from RBI, as it feels DMO can become successful only in close coordination with the central bank. “DMO has to learn from RBI’s experience. So, the central bank will have to do handholding,” the official said.

THE TWO POINTS OF VIEW
FINMIN

With RBI managing both monetary policy and govt debt, there is a conflict of interest

The move will reduce cost of debt, facilitate debt consolidation, and increasing transparency

There are many countries in the world where public debt office is managed by the govt
RBI

RBI has the expertise to manage market volatility; an independent debt agency can't to do so

Advantages of shifting debt management function out of the central bank are overstated

India is different from other countries given the large size of the govt borrowing programme

RBI Governor D Subbarao is against shifting DMO to the finance ministry because of manpower issues. The finance ministry has assured that all 21 public debt offices of RBI will continue to function as they are doing today, but they will function at the behest of DMO.

RBI’s another concern is that when the idea of DMO was conceived, the government’s fiscal situation was under stress and any office within the finance ministry may succumb to these pressures.

The finance ministry’s argument in favour of DMO is that the government is on the path of fiscal consolidation now. “With the setting up of DMO in the finance ministry, the dilemma of RBI between managing monetary policy and debt operations of the government will be eliminated. At present, there is a conflict of interest,” the official added.

Last month Subbarao, who was earlier finance secretary in the government, had said only the central bank had the requisite expertise to manage market volatility, and an independent debt agency, driven by narrow objectives, will not be able to do so.

The finance ministry, on the other hand, wants to separate RBI’s role as the decider of interest rates in the market and at the same time being the banker to the government. At present, the government’s debt is managed by the central bank.

The finance minister, in his Budget speech in February, had proposed to introduce the Public Debt Management Agency of India Bill during 2011-12.

A middle office for debt management purpose is already functioning in the finance ministry as a transition to to the full-fledged office. One of its many functions is to formulate annual debt issuance strategy and periodic calendars of borrowing.