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Friday, September 21, 2012

Central Bank again opposes separation of DMO function

The Reserve Bank of India (RBI) has again voiced concern on separation of the Debt Management Office (DMO) from its ambit.

“Separation of debt management from the central bank needs to be revisited in the wake of global financial crises,” said H R Khan, deputy governor, at a conference in Doha recently.

Earlier, the government had proposed that the DMO work independently, under the finance ministry’s purview. This would be responsible for managing the government's borrowing programme.

The government's market borrowings had increased in recent years and RBI had to put in much effort in the exercise.

However, RBI Governor D Subbarao had stressed there was no conflict of interest in this job and being a central banker. He said only a central bank had the requisite market pulse and instruments to make the needed contextual judgments. According to him, an independent debt agency, driven by narrow objectives, would not be able to do this.

Subbarao felt the advantages of shifting the debt management function out of the central bank were overstated. The advantages were described as higher transparency, helping in debt consolidations, lowering the cost of debt and resolving conflicts of interest. According to Subbarao, these advantages might be valid in a few nations but when it comes to India, where the government borrowings are large, sovereign debt management was beyond merely an exercise in resource raising.

Added Khan: “For development of a deep, efficient and resilient debt market, each country has to focus on the role and responsibility of the state, keeping in view the significance of the debt market, in particular the government bond market in overall economic development and the financial system, even if a country has a budget surplus.”

According to Khan, there is also a need to keep in view a credible and efficient debt management strategy and framework within the overall macro economic policy environment, a strategy for deeper, wider and resilient debt market, and a safe and robust financial market infrastructure. Besides this there should be an effective regulatory and supervisory framework, focusing on financial stability, market integrity, transparency and consumer protection, he said.

He said there might be a confluence of interest between monetary policy and debt management in India.

Source: Business Standard


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