Policy Conflicts in Debt and Monetary Management:

Co-ordination of operations is important so as to avoid differences in the policies of cash and debt management of the government and central bank. This is particularly required keeping in view the fact that the timing and volume of issues of Government Securities need not always coincide with the monetary regulations of the central bank. The central bank needs to consider the liquidity provision if the Government wants to issue securities at a time when the market is illiquid. In such cases the central bank can provide liquidity through the secondary market or through the primary market where the central bank manages both the debt and monetary policy.

At present it can be said that, almost in all countries the central banks are working in tune with the fiscal authority, both at the policy formulation and implementation levels of debt management. Generally it is said that being an agent to the fiscal authority can be problematic for central bank and this can be reduced if the debt management function is separated from the central bank. Such separation should be preceded by institutional and technological infrastructure, fiscal control and developing financial markets otherwise, high fiscal deficit could increase the risk of instability in the economy.

In its recent monetary policy statement, the RBI made its intentions clear about the separation of the debt management function in this regard and the conditions that have to be fulfilled to separate the debt management function. The conditions are: development of financial markets, adequate control over the fiscal deficit and necessary legislative changes. Also, institutional framework for setting up a separate Debt Office for managing the debt functions should be planned. The debt of both central and state governments can be managed by setting up an independent corporate structure.