A separate debt management office in India

Abstract

In recent years, after the global crisis, the issue of separation of monetary policy, fiscal policy and debt management has re-emerged. In many countries, during the period of crisis, scope of fiscal policy was expanded and debt to gross domestic product (GDP) ratios increased significantly. Consequently, debt management, in general, became difficult and coordination between monetary and debt management assumed significance.

Historically, the debt crises of 1982 and the Asian Crisis of 1997 had led many countries to assign priority to public debt management and then, a number of countries chose to separate debt from monetary management. As developments in the government securities market became more sophisticated, a different institutional structure was considered to be better suited to achieve different monetary policy and debt management objectives. In normal economic circumstances, the central bank operates at the short end of the market, and debt management on the long end to minimize cost of raising resources, but in times of crisis, the operations can become blurred. A separation in responsibilities was considered a better solution that reduces the risk of policy conflicts in the central bank actions. Once the financial markets had developed, the role of the central bank in sustaining the markets was considered minimal. Therefore, in many of the Organization for Economic Cooperation and Development (OECD) countries, separation of debt and monetary management had been undertaken in the 1990s.

This chapter discusses the basics of debt management and its separation insection ‘Some basics of debt management’. Traditional viewpoints about separation of debt management, central banks’ independence, and coordination between debt management, monetary and fiscal policy, are presented in section ‘Separate debt management office: A traditional view’. After 2008, the traditional view on separation of debt and monetary management has been challenged by a few central bankers. This debate is presented in section ‘Separate DMO: Post-crisis debate’. Indian debt management practices, role of Reserve Bank of India (RBI) and the debate about separation of debt management in India are discussed in section ‘Debt management in India’. Finally, conclusions are presented in last section.