Govt’s independent DMO to be operational by 2012-13: Finance Ministry

By the end of the next financial year an independent debt management office (DMO) is likely to be fully functional, which will handle the sobering debt of the government. In this year’s Budget speech, Finance Minister Pranab Mukherjee had proposed to introduce the Public Debt Management Agency of India Bill in the next financial year.

The finance ministry has sent the draft bill to all stakeholders, including the Reserve Bank of India (RBI), and comments are soon expected on the bill. If all the stakeholders agree, then the ministry will seek the cabinet’s approval so that it can submit the draft bill in parliament, so that DMO can become operational in 2012.

However, the RBI has often expressed its discontent on the proposed move of shifting debt management functions under its aegis to finance ministry. Whereas as per the finance ministry official, all the differences with the RBI have been shorted out, but publicly, central bank has not supported this move. By adding further he said, we are targeting the winter session for Public Debt Management Agency of India Bill. We need RBI’s comments for drafting legal provisions and various other technicalities. Our aim is to make DMO operational towards the end of the next financial year (2012-13).

However, any objection from apex bank could reduce the chance of introduction of Bill. The finance ministry, on the other hand had said that it had tried to address the concern of the RBI in the design and structure of DMO. On the same time, the ministry has started introductory action on creating DMO.

Another concern of RBI is that, when DMO was planned, the government’s fiscal health was under pressure. To this the ministry’s argument is that the government is on the path of fiscal consolidation. As per the finance ministry, with the setting up of the DMO, the dilemma of RBI between managing monetary policy and debt operations of the government will be eliminated.

At present, both the government’s debt and fresh borrowings are managed by the central bank. The finance ministry, however, is of the view that there is a conflict of interest and wants to divide RBI’s role as the decision maker of interest rate in the market and at the same time being the banker to the government.

Earlier this year, RBI Governor D Subbarao had said only the central bank had the requisite expertise to manage market volatility, and an independent debt agency, driven by narrow objectives, would not be able to do.