Public Debt in India: the Need to Separate Debt from Monetary Management

SCID Working Paper 240





In India, traditionally, a large component of domestic government debt was incurred at low rates of interest, which was statutorily prescribed for subscription by the institutional investors. A substantial amount of domestic debt was also monetised. The fiscal domination of monetary policy left very little flexibility for the Reserve Bank of India, the central bank of the country, to pursue a monetary policy conducive to the overall objective of development of financial markets, price stability and economic growth. In the last decade, due to financial sector reforms undertaken since 1991, the money and government securities markets have developed with the offering of market-related rates of interest on government securities, introduction of new instruments, setting up of trading institutions, and improved regulatory and technological developments. The interest rates in the financial markets are converging and the markets are becoming integrated. The debt management functions and practices have also developed substantially since 1991. In view of the developments in the markets and the commitment on the part of the central government to contain the fiscal deficit, it would be prudent to consider now the separation of monetary and debt management. The separation would provide the central bank with necessary independence in monetary management and an environment to pursue an inflation target, if assigned by the government. The separation of debt management would provide focus to the task of asset-liability management of government liabilities, undertake risk analysis and also help to prioritise government expenditure through higher awareness of interest costs.