The Centre has decided to set up an independent agency to mange its debt. As a precursor, the Finance Ministry will soon set up the Public Debt Management Cell (PDMC) in the Budget Division.
- The PDMC, which will have only advisory functions to avoid conflict with statutory functions of the RBI, will plan government borrowings, including market borrowings and domestic borrowing activities like issuance of Sovereign Gold Bond.
- The PDMC will also manage government’s liabilities, monitor cash balances, improve cash forecasting, foster a liquid and efficient market for government securities along with advising government on matters related to investment, capital market operations, administration of interest rates on small savings, among others.
- PDMC will develop an Integrated Debt Database System (IDMS) as a centralised database for all liabilities of government, on a near real-time basis and undertake requisite preparatory work for PDMA. PDMC will have 15 experienced debt managers from Budget Division, RBI, Middle Office and other government units
Functions of PDMC:
- The PDMC will at present only have advisory functions to avoid “any conflict” with the statutory powers of the RBI.
- To start with, it would plan the borrowings of the Centre, manage the Central government liabilities and monitor the cash balances.
- It would also develop an integrated debt database system as a centralised data base for all liabilities of the government on a near real time basis.
- It will also advise government on matters related to investment, capital market operations and interest rates on small savings as well as undertake requisite preparatory work for PDMA.
Composition of PDMC:
- The PDMC would be staffed with 15 “experienced” debt managers from the Budget Division, RBI, middle office and other units and would be under the overall supervision of the Joint Secretary (Budget), Department of Economic Affairs.
- PDMC will allow separation of debt management functions from RBI to the Public Debt Management Agency (PDMA) in a gradual and seamless manner, without causing market disruptions. The cell will be converted to a statutory authority in about two years’ time. This move would help divest the RBI of its dual and often conflicting roles as the banker and manager of the Centre’s borrowing.
- PDMA will will bring both India's external borrowings and domestic debt under one roof.
- The RBI walks a tight rope while balancing management of public debt and controlling inflation. So, creating the PDMC is a welcome move, which will help the RBI focus on controlling inflation
- The idea of separating public debt management from the Reserve Bank was initiated in 1991. Since then, a plethora of reports culminating in the comprehensive Aziz committee report in September 2008 have vouched for it. Most OECD countries have established dedicated debt management units. Several emerging economies like Brazil, Argentina, Colombia and South Africa, have also restructured and consolidated debt management. It said there are tangible benefits of PDMA, the most important being divorcing borrowing costs from the repo rate.
- The need to set up a separate debt management agency was also driven by the fact that RBI sets monetary policy as well as sells bonds on behalf of the government. It was felt that the central bank may be tempted to try and sell bonds at high prices, while keeping interest rates low, leading to a conflict of interest.