Part of the job

It appears that the Debt Management Office being set up by the government may not only manage the debt of the Central and state governments but also be allowed to manage debt of both public and some private sector companies. This feature would be a welcome addition to the functions of the DMO. Among the concerns about the DMO proposed to be set up are the availability of human capital and skills required for the job. At present,the RBIs job is simple in the sense that it is the regulator of banks and can use moral suasion to make banks (especially public sector banks) buy government bonds. Further,since debt management for the government is not its only responsibility and keeping the cost of debt low by timing the maturity and composition of the debt accurately is not something that it is held primarily accountable for,it is able to get by without requiring too much professional expertise. However,for a professional DMO,whose job is to ensure that the long-term debt costs for the government remain low,the capacity and skills of the team will need to be of extremely high quality. This will become even more important as India moves away from financial repression,embodied today in the high statutory liquidity ratio requirement of banks.

The task of managing the governments debt,which is so big that there needs to be a full calendar of transparent and predictable auctions ahead,is different from that of smaller companies,whether public or private. In the latter case,the volume of the debt is likely to be big,but not as big as that of the government. DMOs,as in the UK,watch the pulse of the financial market and work closely with them to ensure the governments debt programme does not disrupt bond markets. The benefit from the DMO managing PSU and private debt in addition to government debt is thus two-fold. First,it helps PSUs use the DMOs professional expertise. Second,it increases the interaction between the DMO and financial markets,helping the DMO to function better.

Taking a cue from DMOs in the UK and Sweden,the Indian DMO should plan to recruit openly to get the best expertise available in the market for the job. A mix of smart public servants with finance professionals may be required for genuinely carrying out a good job of managing the Indian governments huge debt.