Public Debt Management Agency
Content
Public Debt Management Agency (PDMA) is a specialized independent agency
that manages the internal and external liabilities of the Central Government in a
holistic manner and advises on such matters in return for a fee. In other words,
PDMA is the Investment Banker or Merchant Banker to the Government. PDMA
manages the issue, reissue and trading of Government securities, manages and
advises the Central Government on its contingent liabilities and undertakes cash
management for the central government including issuing and redeeming of
short term securities and advising on its cash management.
PDMA was proposed to be established in India through the Finance Bill, 2015. As
a corollary of the decision to create a PDMA, the RBI or the Central Bank in India
was given the task of inflation targeting under a monetary policy framework
agreement. However, the creation of PDMA was put on hold due to the difference
of opinion on the matter and the relevant clauses were dropped from the Finance
Bill, 2015 while the latter was passed.
PDMA is considered to be set up with the objective of "minimising the cost of
raising and servicing public debt over the long-term within an acceptable level of
risk at all times, under the general superintendence of the central government".
The need for PDMA was felt due to the following reasons:
1. Fragmented jurisdiction in public debt management.
2. There was no comprehensive picture of the liabilities of the Central
Government, which impeded informed decision making regarding both
domestic and foreign borrowing.
3. An autonomous PDMA can be the catalyst for wider institutional reform,
including building a government securities market, and bring in
transparency about public debt.
4. It is considered as an internationally accepted best practice that debt
management should be disaggregated from monetary policy, and taken
out of the realm of the central bank.
5. Shri S S Tarapore led Committee on Capital Account Convertibility
observed that monetary management is often clouded by the monetary
authority's concern about the Government's borrowing programme and
therefore, the Committee recommended that steps should be initiated to
separate the debt management policy from monetary management and to
this effect the Government should set up its own Office of Public Debt. It
was of the view that the RBI should totally eschew from participating in
the primary issues of Government borrowing.
6. Dr Raghuram Rajan chaired Committee on Financial Sector Reforms (2009)
constituted by the Planning Commission pointed out that internationally,
there has been a strong movement towards establishing independent debt
management offices (DMOs) which is now considered as the best practice,
and favoured it.
7. Justice B. N. Srikrishna chaired FSLRC or Financial Sector Legislative
Reforms Commission report (2013) also recommended setting up the
independent "Public Debt Management Agency (PDMA) at the earliest.
Committee observed that management of public debt requires a
specialized investment banking capability for two reasons:
Debt management requires an integrated picture of all onshore and
offshore liabilities of the Government. At present, this information is
fragmented across RBI and the Ministry of Finance. Unifying this
information, and the related debt management functions, will yield
better decisions and thus improved debt management.
A central bank that sells government bonds faces conflicting
objectives. When RBI is given the objective of obtaining low cost
financing for the Government, this may give RBI a bias in favour of
low interest rates which could interfere with the goal of price
stability.
While implementing the FSLRC Committee Recommendations, Union
Budget 2015-16, as part of the Finance Bill, 2015 introduced legal
provisions for creation of a PDMA and accordingly amended the other
relevant Acts - like Government Securities Act, 2006 The RBI Act, 1934,
Securities Contracts Regulation Act 1956 etc.
Contrary views: why central bank should continue to do debt
management functions in India
Creation of a PDMA was a matter of intense debate in India. Many,
at some phase even RBI, believed that debt management functions
should be continued with RBI for the following reasons.
1. Historically RBI had been managing the debt at a lower cost while
keeping the interest rate in line with the requirements of the
economy.
2. Theoretical formulations can conjecture conflicts of interest; the
validity of assumptions need to be tested by evaluation of
experience/performance and on that count, conflict of interest
cannot be established with regard to Reserve Bank.
3. The FRBM Act, 2003 which precluded the Reserve Bank from
participating in the primary auction of the Government bonds has
resolved the conflict of interest with the monetary policy. Monetary
signalling in India is now done by the repo rate (policy rate) under
the liquidity adjustment facility (LAF) and not the bond yields. On
the other hand, Government’s ownership of majority stake in public
sector banks (which own 70 per cent of banking sector assets) could
be a source of conflict of interest with its role as debt manager,
either directly or through an agency controlled by it.
4. Commercial Banks hold more G-Secs than what is warranted under
Statutory Liquidity Ratio (SLR). In India, at present, SLR is more of a
prudential requirement than a captive quota for G-Secs.
5. The size and dynamics of government market borrowing has a much
wider influence on interest rate movements and systemic liquidity.
An autonomous PDMA, driven by specific objectives exclusively
focusing on debt management alone, may not be able to manage
this complex task involving various trade-offs. It may even be
compelled to issue more short term debts and enlarge the space for
foreign investors making economy more vulnerable to the risk of
capital flight.
6. The significant impact of the Government borrowing on the broader
interest rate structure in the economy and, therefore, on the
monetary transmission process in financial markets, makes it a
critical component of the macroeconomic management framework.
Overall coordination by RBI hence becomes important.
7. It may not be true that what has been practiced in some other
countries would come true for India. The institutional arrangements
for debt management must take into view the country specific
context and requirements. The experience of debt management
offices in the Euro area (especially Greece, Portugal and Ireland) has
been less than satisfactory and has resulted in creating financial
instability in the entire Euro Zone
that manages the internal and external liabilities of the Central Government in a
holistic manner and advises on such matters in return for a fee. In other words,
PDMA is the Investment Banker or Merchant Banker to the Government. PDMA
manages the issue, reissue and trading of Government securities, manages and
advises the Central Government on its contingent liabilities and undertakes cash
management for the central government including issuing and redeeming of
short term securities and advising on its cash management.
PDMA was proposed to be established in India through the Finance Bill, 2015. As
a corollary of the decision to create a PDMA, the RBI or the Central Bank in India
was given the task of inflation targeting under a monetary policy framework
agreement. However, the creation of PDMA was put on hold due to the difference
of opinion on the matter and the relevant clauses were dropped from the Finance
Bill, 2015 while the latter was passed.
PDMA is considered to be set up with the objective of "minimising the cost of
raising and servicing public debt over the long-term within an acceptable level of
risk at all times, under the general superintendence of the central government".
The need for PDMA was felt due to the following reasons:
1. Fragmented jurisdiction in public debt management.
2. There was no comprehensive picture of the liabilities of the Central
Government, which impeded informed decision making regarding both
domestic and foreign borrowing.
3. An autonomous PDMA can be the catalyst for wider institutional reform,
including building a government securities market, and bring in
transparency about public debt.
4. It is considered as an internationally accepted best practice that debt
management should be disaggregated from monetary policy, and taken
out of the realm of the central bank.
5. Shri S S Tarapore led Committee on Capital Account Convertibility
observed that monetary management is often clouded by the monetary
authority's concern about the Government's borrowing programme and
therefore, the Committee recommended that steps should be initiated to
separate the debt management policy from monetary management and to
this effect the Government should set up its own Office of Public Debt. It
was of the view that the RBI should totally eschew from participating in
the primary issues of Government borrowing.
6. Dr Raghuram Rajan chaired Committee on Financial Sector Reforms (2009)
constituted by the Planning Commission pointed out that internationally,
there has been a strong movement towards establishing independent debt
management offices (DMOs) which is now considered as the best practice,
and favoured it.
7. Justice B. N. Srikrishna chaired FSLRC or Financial Sector Legislative
Reforms Commission report (2013) also recommended setting up the
independent "Public Debt Management Agency (PDMA) at the earliest.
Committee observed that management of public debt requires a
specialized investment banking capability for two reasons:
Debt management requires an integrated picture of all onshore and
offshore liabilities of the Government. At present, this information is
fragmented across RBI and the Ministry of Finance. Unifying this
information, and the related debt management functions, will yield
better decisions and thus improved debt management.
A central bank that sells government bonds faces conflicting
objectives. When RBI is given the objective of obtaining low cost
financing for the Government, this may give RBI a bias in favour of
low interest rates which could interfere with the goal of price
stability.
While implementing the FSLRC Committee Recommendations, Union
Budget 2015-16, as part of the Finance Bill, 2015 introduced legal
provisions for creation of a PDMA and accordingly amended the other
relevant Acts - like Government Securities Act, 2006 The RBI Act, 1934,
Securities Contracts Regulation Act 1956 etc.
Contrary views: why central bank should continue to do debt
management functions in India
Creation of a PDMA was a matter of intense debate in India. Many,
at some phase even RBI, believed that debt management functions
should be continued with RBI for the following reasons.
1. Historically RBI had been managing the debt at a lower cost while
keeping the interest rate in line with the requirements of the
economy.
2. Theoretical formulations can conjecture conflicts of interest; the
validity of assumptions need to be tested by evaluation of
experience/performance and on that count, conflict of interest
cannot be established with regard to Reserve Bank.
3. The FRBM Act, 2003 which precluded the Reserve Bank from
participating in the primary auction of the Government bonds has
resolved the conflict of interest with the monetary policy. Monetary
signalling in India is now done by the repo rate (policy rate) under
the liquidity adjustment facility (LAF) and not the bond yields. On
the other hand, Government’s ownership of majority stake in public
sector banks (which own 70 per cent of banking sector assets) could
be a source of conflict of interest with its role as debt manager,
either directly or through an agency controlled by it.
4. Commercial Banks hold more G-Secs than what is warranted under
Statutory Liquidity Ratio (SLR). In India, at present, SLR is more of a
prudential requirement than a captive quota for G-Secs.
5. The size and dynamics of government market borrowing has a much
wider influence on interest rate movements and systemic liquidity.
An autonomous PDMA, driven by specific objectives exclusively
focusing on debt management alone, may not be able to manage
this complex task involving various trade-offs. It may even be
compelled to issue more short term debts and enlarge the space for
foreign investors making economy more vulnerable to the risk of
capital flight.
6. The significant impact of the Government borrowing on the broader
interest rate structure in the economy and, therefore, on the
monetary transmission process in financial markets, makes it a
critical component of the macroeconomic management framework.
Overall coordination by RBI hence becomes important.
7. It may not be true that what has been practiced in some other
countries would come true for India. The institutional arrangements
for debt management must take into view the country specific
context and requirements. The experience of debt management
offices in the Euro area (especially Greece, Portugal and Ireland) has
been less than satisfactory and has resulted in creating financial
instability in the entire Euro Zone
