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Friday, July 20, 2018

Don’t rush the PDMA

Public debt management is best left to the RBI.

Written by R K Pattnaik | Updated: May 12, 2015 12:00:28 am
In the interest of pragmatic monetary and fiscal coordination, it is prudent to leave debt management to the RBI. (Illustration: C R Sasikumar) In the interest of pragmatic monetary and fiscal coordination, it is prudent to leave debt management to the RBI. (Illustration: C R Sasikumar)

There has been considerable discussion on the proposal to establish the Public Debt Management Agency (PDMA) to manage Central government debt. Supporters backed the move primarily on the ground of conflict of interest, given the RBI’s functions as the monetary authority. However, on April 30, the finance minister stated that clauses relating to the PDMA, amendments to the RBI Act 1934 and the Government Securities Act 2006 would be withdrawn from the Finance Bill, 2015. The FM also announced that the Union government would now work on a roadmap for the PDMA and unified financial market regulator in consultation with the RBI. This is welcome. In the interest of pragmatic monetary and fiscal coordination, it is prudent to leave debt management to the RBI.

First, the conventional conflict of interest argument is myopic. Evidence suggests that the smooth conduct of the government’s large borrowing programme has been facilitated in a non-disruptive manner because the RBI, apart from being the banker and debt manager to the government, has a broad range of responsibilities, including regulation and surveillance. The RBI’s endeavours in debt management have resulted in significant improvements in the government securities (G-Sec) market trading and settlement system, with greater transparency, more efficient price discovery, no settlement risk, lower transaction costs and a level playing field.

Second, the conflict of interest argument does not hold much water given the prohibition on the RBI’s participation in the primary market under the Fiscal Responsibility and Budget Management Act since 2006. Thus, the primary market interest rates of government borrowing, solely auction-driven, are no longer viewed as interest rate signalling by the RBI.

Third, the present system of managing debt has certain synergies. It has performed well in ensuring that debts are raised at reasonable cost and with low risk. Contrast the eurozone’s burgeoning and risky public debt structures created by its debt offices. Denmark and Iceland have shifted debt management back to the central bank. Post-crisis, there was serious debate in the UK parliament to return debt management to the Bank of England.

Fourth, independent management and issuance of government debt could distort the sovereign yield curve in a thin market, jeopardising monetary signalling and its transmission. Fifth, a likely outcome of the separation could be the emergence of multiple debt management agencies. Coordination among debt managers then will be difficult and eventually lead to conflict. Sixth, as banker, the RBI has been helpful in accommodating the deficit and surplus modes, taking into account the market’s absorptive capacity. One is doubtful if an independent body will have the experience to handle cash management of such magnitude.

Seventh, in the global post-crisis environment, there is a rethinking that debt management is again becoming a critical element for financial stability, as Greece has shown. The Bank for International Settlements’ study (November 2010) noted that debt management can no longer be viewed as a routine function that can be delegated to a separate, independent body. Instead, it lies at the crossroads of monetary and fiscal policies. The study further opined that in difficult times, G-Sec market conditions are better managed by central banks. Eighth, as regards the unified regulator, the question is: Should we follow the so-called unified regulator approach after the spectacular failures of supervisors like the UK’s Financial Services Authority?

Ninth, the middle office set up within the finance ministry may be further strengthened to coordinate and provide technical and analytical input to the cash and debt management committee.

Tenth, the roadmap for separation should be gradual and calibrated, with emphasis on country-specific micro-market structure, progress on fiscal and cash management by government, debt management by state governments and liquidity and monetary management by the RBI.

The writer is a professor at SPJIMR, Mumbai. Views are person.

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