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Q. Managing public debt: Comment on governments move to relieve central bank from public debt management.
Oct 07, 2016 Related to : GS Paper-3

Ans :

Introduction-

The central government is planning relieve Reserve Bank of India from public debt management in about two years of time. Recently government has set up a Public Debt Management Cell (PDMC) as interim arrangement to facilitate separation of debt management functions from RBI to the Public Debt Management Agency (PDMA) in a gradual and seamless manner, without causing market disruptions.

Reasons for separation-

  • When RBI manages debt, it leads to a conflict with its role as monetary authority working to contain inflation and ensure financial stability.
  • Both, Inflation control and financial facility process generally pulls in opposite direction for example, rising inflation demands an increase in policy rates but the government wants debt should be offered at a low rate.
  • Similarly RBI has been overburdened with various tasks it does currently. And it will be difficult to focus minutely on all the aspects.

Analysis-

  • Around the world several countries have relieved their central banks from managing public debt, and recent move by government is in line with standard practices adopted across the world.
  • Relieving from debt management will end the conflicting situations that RBI currently faces.
  • Hiving off debt management will allow the central bank to focus on monetary policy of setting short-term interest rates.

Suggestions-

  • But radical departure from the current practice is neither desirable nor possible.  Hence government should rope existing RBI functionaries.
  • Recent financial crisis have shown that the management of government debt, regulation of banks and monetary policy are all interlinked. Hence there must be a proper sync between RBI and Government.

Conclusion-

Recent decision by government to separate debt management functions from RBI is in sync with standard global practices. Separating debt management from RBI has several benefits. But government should take RBI on board while making decisions on debt management.


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