The Reserve Bank of India (RBI) has advised the government to put the creation of a debt management office (DMO) on the backburner because of the huge borrowing programme this fiscal. The banking regulator has communicated its views to the finance ministry in an official letter written by former deputy governor Rakesh Mohan before he left RBI in June. Mohan’s letter said, given the demands of the government’s net borrowing programme of Rs 3,97,957 crore this fiscal — a massive 52 per cent more than in 2008-09 — “The time is not ripe for the complete separation of debt management from the Reserve Bank at the current juncture.”

The finance ministry is at present working on a Bill to set up a separate DMO, independent of the ministry and the RBI. There is already a middle office housed within the finance ministry that crunches data, but a full-fledged office will have a far larger role. It will operate on an MoU with the finance ministry that will decide the amount of bonds to be floated each year, the price of the coupons, the tenor of the papers and even their periodicity.

The step is expected to bring in a large degree of transparency to the government’s debt management operations. The aim of the Bill is, therefore, to facilitate the expansion of the bond market, removing the overarching presence of the government as a market maker and price setter. But the official communication from the former deputy governor means the RBI will lay out its opposition to the move if the Bill is tabled in Parliament. This will create problems when the Bill is sent to the standing committee on finance. RBI’s objections will scupper the chances of the Bill making it past the standing committee, even though the actual setting up of the office is not expected before 2011-12. The RBI will release its annual monetary policy on July 28, wherein these issues are again expected to surface. On condition of anonymity, an RBI official said the umbilical chord between Mint Road and the banks mean even such a large bond issue will sail through. “But, that will become very difficult for an independent body like a DMO,” he added.

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