Eighteen months into Budget 2007-08, a promise by Finance Minister P Chidambaram to vest the Reserve Bank of India’s powers to manage government debt — estimated at Rs 18.44 lakh crore or almost 40 per cent of the GDP, as on March 31, 2008 — into a separate entity, is finally taking shape.

Officials say the new entity is likely to be a public sector undertaking (PSU) under the Finance Ministry but will have both the Union Government and states as stakeholders. Besides managing the Centre’s internal debt, it will also handle the government’s new debt issuances. In 2008-09, the Centre plans to borrow a sizeable Rs 96,000 crore from the market.

The move to set up a debt-management entity will be the first major step in central bank reforms in India. In most developed economies, including the US, UK, Australia and Canada, it is an organisation with the sole objective of minimising the cost of borrowing for the government and is distinct from the central bank. The central bank in such countries restricts itself to the conduct of monetary policy with a dominant focus on setting short-term rates to manage inflation.

Officials said it will end the conflict of interest the RBI currently faces between setting the short-term rate through its monetary policy and selling government bonds at higher prices resulting in an inflationary bias. Another conflict arises because of the banking sector regulator’s mantle the RBI dons. To sell bonds, it asks banks to buy these, which may not be in the best interest of the banks.

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