Rbi’s Debt Management and Monetary Policy Roles Create a Conflict of Interest

Topics: Interest rate, Monetary policy, Government debt Pages: 3 (942 words) Published: January 21, 2013
RBI’s debt management and monetary policy roles create a conflict of interest Introduction:
I have shown you in class, using the IS-LM model, how the above two roles of the RBI presents a conflict between the desired positions of the LM curve and therefore the equilibrium interest rate. Some of you have expressed interest in knowing more about this debate. Therefore here are the two opposing points of view. For the motion:

On this side of the debate is the government which supports an independent Debt Management Office (DMO) that is separate from the RBI. The government has received support from the Report of the Internal Working Group on Debt Management which has pointed out three conflicts that arises from the present arrangement: “If the Central Bank tries to be an effective debt manager, it would lean towards selling bonds at high prices, i.e. keeping interest rates low. This leads to an inflationary bias in monetary policy.” Second “if the Central Bank tries to do a good job of discharging its responsibility of selling bonds, it has an incentive to mandate that banks hold a large amount of government paper.” Third, “if the Central Bank administers the operating systems for the government securities markets, as the RBI currently does, this creates another conflict, where the owner/ administrator of these systems is also a participant in the market.” The Percy Mistry Committee on Making Mumbai an International Financial Centre (IFC) recommended the setting up of an autonomous DMO by saying that “looking ahead, a sound public borrowing strategy for India would incorporate three elements. . . An independent Indian “debt management office” - operating either as an autonomous agency or under the Ministry of Finance - that regularly auctioned a large quantum of INR denominated bonds in an IFC in Mumbai. The size of these auctions would be substantial by world standards and would enhance Mumbai’s stature as an IFC.” The Raghuram Rajan committee on Financial Sector...
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