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Public Debt Management Agency (PDMA)

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(Created page with "<p align="center"> <strong>Public Debt Management Agency (PDMA)</strong></p> <p><br /> See </p> <p >[http://arthapedia.in/index.php?title=Public_Debt Public Debt] </p> <p>[htt...")
 
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<p align="center"> <strong>Public Debt  Management Agency (PDMA)</strong></p>
 
 
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   See </p>
 
   See </p>
 
<p >[http://arthapedia.in/index.php?title=Public_Debt Public Debt] </p>
 
<p >[http://arthapedia.in/index.php?title=Public_Debt Public Debt] </p>
 
<p>[http://arthapedia.in/index.php?title=Public_Debt_Management_of_the_Union_Government_in_India Public  Debt Management in Union Government of India] and </p>
 
<p>[http://arthapedia.in/index.php?title=Public_Debt_Management_of_the_Union_Government_in_India Public  Debt Management in Union Government of India] and </p>
<p>  Contingent  liabilities </p>
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<p>  [http://arthapedia.in/index.php?title=Contingent_Liabilities Contingent  liabilities] </p>
 
<p>  Public Debt Management Agency (PDMA) is a specialized independent agency that manages the  internal and external liabilities of the Central Government in a holistic  manner  and advises on such matters in  return for a fee. In other words, PDMA is the Investment Banker or Merchant  Banker to the Government. PDMA manages the issue, reissue and trading of  Government securities, manages and advises the Central Government on its contingent  liabilities and undertakes cash management for the central  government including issuing and redeeming of short term securities and  advising on its cash management. </p>
 
<p>  Public Debt Management Agency (PDMA) is a specialized independent agency that manages the  internal and external liabilities of the Central Government in a holistic  manner  and advises on such matters in  return for a fee. In other words, PDMA is the Investment Banker or Merchant  Banker to the Government. PDMA manages the issue, reissue and trading of  Government securities, manages and advises the Central Government on its contingent  liabilities and undertakes cash management for the central  government including issuing and redeeming of short term securities and  advising on its cash management. </p>
 
<p>  PDMA was established in India through the Finance Act, 2015. As a  corollary of the decision to create a PDMA, the RBI or the Central Bank in  India was given the task of [http://arthapedia.in/index.php?title=Inflation_Targeting_In_India inflation  targeting] under a [http://finmin.nic.in/reports/MPFAgreement28022015.pdf monetary  policy framework agreement]. </p>
 
<p>  PDMA was established in India through the Finance Act, 2015. As a  corollary of the decision to create a PDMA, the RBI or the Central Bank in  India was given the task of [http://arthapedia.in/index.php?title=Inflation_Targeting_In_India inflation  targeting] under a [http://finmin.nic.in/reports/MPFAgreement28022015.pdf monetary  policy framework agreement]. </p>

Revision as of 16:19, 10 March 2015


See

Public Debt

Public Debt Management in Union Government of India and

Contingent liabilities

Public Debt Management Agency (PDMA) is a specialized independent agency that manages the internal and external liabilities of the Central Government in a holistic manner  and advises on such matters in return for a fee. In other words, PDMA is the Investment Banker or Merchant Banker to the Government. PDMA manages the issue, reissue and trading of Government securities, manages and advises the Central Government on its contingent liabilities and undertakes cash management for the central government including issuing and redeeming of short term securities and advising on its cash management.

PDMA was established in India through the Finance Act, 2015. As a corollary of the decision to create a PDMA, the RBI or the Central Bank in India was given the task of inflation targeting under a monetary policy framework agreement.

PDMA is set up with the objective of "minimising the cost of raising and servicing public debt over the long-term within an acceptable level of risk at all times, under the general superintendence of the central government". This will guide all of its key functions, which include managing the public debt, cash and contingent liabilities of Central Government, and related activities.

Need for PDMA

The need for PDMA was felt due to the following reasons:

Background

Genesis of the thinking on an independent debt management office is traced back to the Committee on Capital Account Convertibility (1997) and the Review Group of Standing Committee on International Financial Standards & Codes (2004). Both were in-house reports from RBI.

Based on the significant shortening of the maturity profile of the Government debt (65% of the Government debt was short term in nature with below 5 year maturity as identified in the 1995-96 Annual report of RBI), the Shri S S Tarapore led Committee on Capital Account Convertibility observed that monetary management is often clouded by the monetary authority's concern about the Government's borrowing programme and therefore, the Committee recommended that steps should be initiated to separate the debt management policy from monetary management and to this effect the Government should set up its own Office of Public Debt. It was of the view that the RBI should totally eschew from participating in the primary issues of Government borrowing. The Committee was of the view that these measures would go a long way towards better fiscal management and also enable vastly improved monetary management which will be necessary in the context of capital account convertibility (CAC).

While analysing the process of monetary policy formulation, Shri Y V Reddy and Shri C M Vasudev led Review Group of Standing Committee on International Financial Standards & Codes observed that there is a strong interaction between RBI's responsibilities in the areas of monetary policy and internal debt management leading to a situation of monetary policy function becoming somewhat subservient to debt management. In view of the Committee, Debt Management function puts RBI in a situation of direct conflict of interest. While discussing transparency, accountability and autonomy of RBI, the Advisory Group was of the view that RBI needs by way of autonomy, headroom to operate monetary policy and this is possible when debt management is separated from monetary policy and the fiscal situation is in reasonable balance. However, Committee recommended that RBI would continue to maintain orderly conditions in the government securities market by operating in the secondary market via open market operations, an important instrument of monetary policy. The Group suggested that RBI and Government should progressively work towards greater clarity in publicly setting out the objectives of monetary policy. In regard to setting up of objectives of monetary policy, the Group was of the view that besides making it easy for the public to comprehend the instruments and objectives of monetary policy, there is merit in authorities clarifying issues in monetary and financial policies in simple language to general public. The Advisory Group recommended for setting up a Monetary Policy Committee (MPC) on the lines of Board for Financial Supervision (BFS) from the next financial year. Also, it recommended that MPC should hold meeting on monthly basis on a predetermined date and issue a short statement immediately after the meeting.

Further, for an effective functional separation enabling more efficient debt management as also monetary management,  the second Committee on Fuller Capital Account Convertibility in 2006 headed by Shri. S S Tarapore recommended that the Office of Public Debt should be set up to function independently outside the RBI.

Creation of a debt management office was also one of the recommendations of the Percy Mistry Committee (or the High Powered Expert Committee [HPEC]) on Making Mumbai an International Financial Centre which submitted its report to Ministry of Finance in 2007. HPEC believed that the function of a public debt management office should be either completely independent – in the form of an autonomous agency – or placed in the Ministry of Finance rather than in a regulatory institution like RBI to avoid any perception of conflicts-of-interest in the eyes of regulated financial firms. Following this, in Union Budget 2007-08 speech, vide para 106, Finance Minister proposed to set up an autonomous Debt Management Office (DMO) and, in the first phase, a Middle Office was set up inside Ministry of Finance to facilitate the transition to a full-fledged DMO.

Simultaneously, Ministry of Finance formed an Internal Working Group, Chaired by Shri. Jahangir Aziz, to analyse how best to move forward on establishing a DMO. Report of the Internal Working Group on Debt Management (October 2008), suggested creating a "National Treasury Management Agency (NTMA)" as an independent public debt management office and proposed a draft bill for the same. The Working Group envisioned an agency that will manage debt for the Centre and States, with the overarching objectives of meeting their financing needs, while minimising borrowing costs within acceptable levels of risk. NTMA was also to undertake cash management, management of contingent and other liabilities, risk assessment, and advisory functions. The proposed NTMA were to act at all times as the agent of the Central and of State Governments. Therefore, the draft Bill tried to ensure that the NTMA is adequately accountable to its principals. At the same time, it aimed to ensure that the NTMA does not face counterproductive constraints, so that the Central and State Governments can benefit from focussed debt management expertise.

Dr Raghuram Rajan chaired Committee on Financial Sector Reforms (2009) constituted by the Planning Commission pointed out that internationally, there has been a strong movement towards establishing independent debt management offices (DMOs) which is now considered as the best practice, and favoured it.

Justice B. N. Srikrishna chaired FSLRC or Financial Sector Legislative Reforms Commission report (2013) also recommended setting up the independent "Public Debt Management Agency (PDMA) at the earliest. Committee observed that management of public debt requires a specialized investment banking capability for two reasons:

FSLRC mostly followed the suggestions of the Jahangir Aziz Committee report of 2008 and suggested to keep (a) debt management distinct from monetary management (b) to include the tasks of cash management and contingent liabilities of the Government in debt management and to integrate all these functions into a single agency called "Public Debt Management Agency" (PDMA) which is similar in functions to "National Treasury Management Agency" suggested by the Aziz Committee. A legislative bill to this effect -the draft financial code - was also developed by the FSLRC.

While implementing the FSLRC Committee Recommendations, Union Budget 2015-16, as part of the Finance Bill, 2015 introduced legal provisions for creation of a PDMA and accordingly amended the other relevant Acts - like Government Securities Act, 2006 The RBI Act, 1934, Securities Contracts Regulation Act 1956 etc. Further, the Government Securities Act, 2006 was also repealed in the process.

Features of PDMA as outlined in the Finance Act, 2015

Structure & Administration

Functions

Relationship of RBI with central Government after the removal of debt management functions

The Constitution of India gives the executive branch of the Government the powers to borrow upon the security of the Consolidated Fund of India. Reserve Bank as an agent of the Government (both Union and the States) implemented the borrowing program. The Reserve Bank draws the necessary statutory powers for debt management from Section 21 of the Reserve Bank of India Act, 1934. While the management of Union/Central Government's public debt is an obligation for the Reserve Bank, the Reserve Bank undertakes the management of the public debts of the various State Governments by agreement. The procedural aspects in debt management operations were governed by the Government Securities Act, 2006 and rules framed under the Act. The debt management functions comprised of formulation of a calendar for primary issuance, deciding the desired maturity profile of the debt, size and timing of issuance, designing the instruments and methods of raising resources, etc. taking into account government's needs, market conditions, and preferences of various segments while ensuring that the entire strategy is consistent with the overall macro-economic policy objectives. Reserve Bank also undertakes the conduct of auctions and manages the registry and depository functions.

All these functions are now transferred to PDMA in respect of the central government and the RBI Act is amended accordingly. RBI is required by law (Finance Act, 2015) to provide all necessary information and assistance to the effective functioning of PDMA.

With the creation of PDMA, RBI is given the explicit task of inflation targeting and reducing its earlier focus on multiple objectives like growth, financial stability, monetary management, debt management etc.

RBI may still be managing the borrowing requirements of the state governments as per the agreement it has entered into with them earlier.

Though debt management is taken out of RBI, it would continue to function as the banker to the Government. As a banker to the Government, the RBI would perform the same functions for the Government as a commercial bank performs for its customers. It would maintain accounts of the Government; receive deposits from, and make advances to the Government; provide foreign exchange resources to the Government for repaying external debt or purchasing foreign goods or making other payments.

Contrary views: why central bank should continue to do debt management functions in India

Creation of a PDMA was a matter of intense debate in India. Many, at some phase even RBI, believed that debt management functions should be continued with RBI for the following reasons.

Expected Outcomes from PDMA

The Public Debt Management Agency (PDMA) will bring both India’s external borrowings and domestic debt under one roof and would usher in better debt management practices such as creating a "medium term debt strategy framework", just as the case for fiscal deficit. This may also lead to gradual reduction of Statutory Liquidity Ratio (SLR) and frees up the lending space of commercial banks. Further, deepening of the Indian Bond market is one vital factor in promoting investment in India. The process of bringing the Indian bond market at the same level as India’s world class equity market is proposed to be initiated by setting-up PDMA. In addition, while paving the way for a vibrant government securities market, PDMA would also pave the way for a vibrant derivative market based on it, such as interest rate derivatives.

References

Public Debt Management: Reflections on Strategy & Structure Keynote Address by H R Khan, Dy Governor RBI at IIM Bangalore, August 2014



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