Government's plan to take away the public debt management role from the Reserve Bank over the next two years is a welcome step as it will help the central focus on inflation management, says a report.
The Finance Ministry had yesterday announced setting up of the Public Debt Management Cell to streamline government borrowings, which it hopes will lead to better cash management.
"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," SBI Research said in a report today.
The report said for efficient running of the system, there is a need that the PDMC, RBI and Sebi act in a coordinated manner.
The PDMC, which will be housed at the RBI's Delhi office, is an interim arrangement and will be upgraded to a statutory Public Debt Management Agency (PDMA) in two years.
The Finance Ministry already has the Middle Office in the Budget Division, which handles formulation of a long-term debt management strategy, annual debt issuance and periodic calendars of borrowing, forecasting cash and borrowing requirements.
It also lays down a comprehensive risk management framework. This office will be subsumed into PDMC now.
The interim arrangement will allow separation of debt management functions from the apex bank to PDMA in a gradual and seamless manner, without causing market disruptions.
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.
"Our estimates show that a 1 bps change in G-secs yield gives around 7 paise movement. With a borrowing of around Rs 6 trillion, the incremental saving could be at least Rs 4,000 crore," the report said.
But it cautioned that evolution of term structure of interest rates in countries with PDMA suggests it may be foolhardy to believe government borrowing costs will always decline (Brazil, Portugal, Ireland show the reverse).
"We believe such movements will only be a function of domestic macro conditions. For this to happen, the proposed PDMA must resist any temptation to issue short-term/foreign debt in a disproportionate fashion, endangering sovereign risks, which is currently at under 10 per cent of government debt)," the report concludes.
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