Sovereign debt management in India: Understanding interaction with monetary policy and recommendations

Abstract

India’s expansionary fiscal policy during the recent crisis resulted in higher government borrowings in recent years. These borrowing requirements come about 60-80% of the total budget every year. The debt-to-GDP ratio increased to 73% post global financial crises form the earlier level of 69%, giving rise to a severe challenge for the RBI in meeting the Government’s borrowing requirements without disrupting the market. To hold costs of borrowing down while scheduling issue maturities so that the risk of rollover was kept to a minimum, the RBI followed a multi-pronged strategy. Increase in short-term debt can also jeopardise the monetary policy signalling and transmission. In the light of these issues, there is a need to understand the interaction between the Sovereign Debt Management and its monetary policy implications. A better structure can then be suggested, which can keep the central bank isolated from these issues with the aim tackling these issues better.