Harun R Khan: Public debt management - reflections on strategy &
structure
Keynote address by Mr Harun R Khan, Deputy Governor of the Reserve Bank of India, at the
9th Annual International Conference on "Public Policy & Management: Debt Management",
Indian Institute of Management, Bangalore, 11 August 2014.
* * *
The contributions of Shri N R V V M K Rajendra Kumar and Km. Renuka Balakrishnan of the Reserve Bank of
India are gratefully acknowledged.
1. I am thankful to the Centre for Public Policy, Indian Institute of Management, Bangalore
and Prof. Charan Singh in particular for inviting me to this conference. As suggested by the
organizers, I would like to share some thoughts on the strategy and structure of public debt
management in India with the experts and enthusiasts gathered here.
2. Globally it is a well-recognised fact that countries need efficient and effective public debt
management as public debt portfolio is the largest portfolio in the economy and its impact
could be felt across generations. This prompted Herbert Hoover to remark "Blessed are the
young for they shall inherit the national debt". Policy makers need to bestow special attention
on debt management as debt sustainability has implications for financial stability as well as
well-being of future generations.
3. The debt management in India has come of age from the phase of administered interest
rates and high preemptions in the pre-reform period prior to 1990s. The reforms undertaken
both in the debt management framework as well as in the Government securities (G-Sec)
market has resulted successful management of large borrowing program with least market
distortions or disruptions. From central bank funding budget deficits, we now have a system
where all Government borrowings are funded through auctions at market determined rates.
Statutory pre-emptions were brought down significantly. The annual gross market borrowing
of the Government of India and the State Governments increased from ₹ 122.83 billion in
1991-92 to ₹ 7602 billion in 2013-14. The amount of outstanding Government of India
securities increased from ₹ 780.23 billion in 1991-92 to ₹ 35,141 billion in 2013-14. Policy
action was taken on fiscal front by passing the Fiscal Responsibility and Budget
Management (FRBM) Act in 2003, firmly setting targets for fiscal correction. Fiscal
consolidation has both political and administrative commitment. G-Sec market has been
developed through series of developmental measures. It is reasonably liquid and deep with
diverse investor base and instruments. Reforms, such as, introducing new instruments,
expanding the investor base, strengthening market infrastructure, etc. have further
strengthened the G-Sec market. As a result, we have a yield curve that spans for thirty years,
world-class trading and settlement infrastructure and keen foreign investor interest. On the
sustainability front, the debt ratios are reasonable. Debt to GDP ratio has declined in the past
decade and stands at 39 per cent of GDP for the Central Government (49 per cent of GDP
for the total Central Government liabilities) in 2013-14 (RE). Interest payments to revenue
receipts ratio of the Central Government at 37 per cent in 2013-14 (RE) was significantly
lower than 51 per cent in 2002-03. In line with the renewed move towards fiscal
consolidation from 2012-13, GFD declined to 4.6 per cent of GDP in 2013-14 (RE) from
4.8 per cent in 2012-13. It is budgeted to decline further to 4.1 per cent in 2014-15.
4. In this backdrop, I will share my thoughts on the debt management operations of the
Reserve Bank of India with special emphasis on management of the Government of India
debt.
Role of Reserve Bank and the government in public debt management:
Legal and institutional framework
5. It is a sound practice to have appropriate legal framework and institutional
structure/organizational arrangements in place for public debt and the entities given powers
to borrow must be entrusted with clear responsibility and transparency. The Constitution of
India gives the executive branch of 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) implements 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 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 are governed by the Government Securities Act, 2006 and rules framed under the
Act.
6. External debt (bilateral and multilateral loans) is managed by the Department of Economic
Affairs in the Ministry of Finance (MoF). All debt management functions for marketable
internal debt are undertaken in the Reserve Bank. These functions comprise 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.
7. Decisions on the implementation of the borrowing program, based on proposals made by
the Reserve Bank, are periodically taken by the Monitoring Group on Cash and Debt
Management. This is a standing committee of officials from the MoF and the Reserve Bank.
While this represents a formal working relationship between the MoF and the Reserve Bank,
it is further complemented by regular discussions between the Ministry and the Reserve
Bank.
8. With regard to accountability and reporting, the operations of the debt management
functions in Reserve Bank are subject to the statutory audit, internal audit and concurrent
audit. Recently, the Comptroller and Auditor General (CAG) have started a performance
audit of debt management operations in the MoF and the Reserve Bank focusing on three
"E"s of process excellence viz. Economy, Efficiency and Effectiveness. While the internal
debt management activities are reported in the Annual Report of the Reserve Bank, which is
a statutory report and is placed before the Parliament (through MoF), the external debt
management functions are reported in the Annual Status Report on External Debt presented
to the Parliament by the Finance Minister. Further, the MoF is publishing an annual report on
Government Debt, the Middle Office in the Budget Division is publishing quarterly reports on
the debt issued. Therefore, a robust reporting of debt is in place in our country.
9. As can be seen, we have sound institutional mechanism with roles and responsibilities
clearly entrusted to the Reserve Bank and the Government. This has helped in discharging
our mandate effectively.
Debt management strategy
Policy objectives
10. The main objective of debt management is to ensure that the government's financing
needs and its payment obligations are met at low cost over the medium to long run
consistent with a prudent degree of risk. Prudent degree of risk ensures that no problems
exist in rollover of debt. Further, the debt structure must be sustainable to ensure financial
stability across time periods. Another important objective is to promote deep and liquid
financial markets to minimize long term borrowing cost markets. The debt management
policy must also be consistent with other macro-economic policies including monetary policy.
11. Debt Management Strategy (DMS) comprising objectives, various benchmarks & portfolio
indicators and yearly issuance plan (external and domestic funding, instruments, maturity
structure, etc.) provides requisite direction to the debt management operations. Its
articulation imparts information and transparency, certainty and enables market participants
(investors) to chalk out their investment strategy in the G-Sec market. Our DMS revolves
around three broad pillars viz., cost minimization, risk mitigation and market development.
Cost minimisation
12. Cost minimization is sought to be achieved over medium to long run by formulating
appropriate issuance strategy and developing financial markets. The borrowing needs are
estimated and amounts are borrowed in timely fashion thereby minimising the opportunity
cost. Proper demand estimation, planned issuance and offer of appropriate instruments
would aid in lowering costs. In India, the issuance calendar for market borrowings is
announced in advance for each half year with details of the quantum to be borrowed each
week, maturity buckets, etc. A week prior to the auction, individual securities along with their
issuance size is notified to public. This strategy of sharing information about debt
management has enhanced transparency of debt management operations. The borrowings
are planned keeping in view the investment preferences/horizons of various investors. As
commercial banks are large investors in G-Sec and are interested in short/medium tenor
bonds, substantial issuance is in this tenor. Longer tenor bonds are issued keeping in view
demand from insurance companies and provident funds. It may be noted that cost
minimisation objective refers to the planning horizon of debt management as minimizing
costs at any point in time is different from minimizing costs over a longer time horizon. What
might seem cost-efficient today may prove rather costly over a number of years. It is exactly
the acknowledgment of this distinction that would help mitigate the alleged "dilemma" of
minimizing costs while containing risks. The cost minimization attempted over short-term by
the debt managers may create sub-optimal debt structures, which may create stress for
issuer by enhancing refinancing risks as was seen during the recent European sovereign
debt crisis. Recognising the need for appropriate debt portfolio structure, we have desisted
from issuance in short tenors as debt maturing in ten years constitutes nearly 60 per cent of
total debt.
Risk mitigation
13. The sovereign debt portfolio is exposed to rollover risk, currency/exchange rate risks,
sudden-stop risks and interest rate risks which need to be managed.
Rollover / refinancing risk
14. Elongation of maturity of the portfolio is preferred strategy to limit rollover risk. DMS in
India has stressed on elongation of maturity whenever possible and, in turn, cost
minimization over the medium term (Table 1). This is achieved by limiting issuances in short
tenor bonds and increasing issuance of medium/long tenor bonds taking into account the
investor preferences and shape of the yield curve. Though we have issued short term bonds
to meet the needs of market borrowings for fiscal stimulus in wake of global financial crisis,
we have adopted a conscious strategy of elongating maturity to lessen rollover risk. This is
achieved by non-issuance in maturity of 1-5 years, moderating issuance in 5-9 years and
increasing issuance in 10-14 year tenor which sees robust demand from banks and other
market participants. We have also increased issuance of bonds in tenors more than 15 years
to cater to needs of insurance companies and provident funds. Presently, weighted average
maturity of India's debt portfolio at 10 years is one of the longest in the world. With an
objective to smoothen redemptions, switching of short-tenor bonds maturing at proximate
years with long-tenor bonds is also being attempted and is expected to reduce rollover risks.
Exchange rate risks
15. Achieving appropriate and stable mix of domestic and foreign currency debt in portfolio is
essential. Raising debt in foreign currency could be cost effective and provide a wide and
varied investor base. A country with large foreign currency denominated liabilities is,
however, exposed to "currency/exchange rate risks" which could impact macro-economic
stability. Further, dependence on foreign currency bonds could mean sharp volatility in
interest rate and market volumes linked to the uncertainty of external sovereign ratings.
Hence, no sovereign foreign currency bonds have been issued so far by India. Sizeable
domestic currency bond issuances are necessary to ensure supply of bonds in the domestic
bond market which is a very critical ingredient for development of the domestic bonds
market. As a conscious strategy, issuance of external debt (denominated in foreign currency)
is kept very low in India and external debt as percentage of Central Government's public debt
has come down from 6.4 per cent in 2005-06 to 5.2 per cent during 2011-12 (Chart 1). The
external debt in Indian context is entirely bilateral and multilateral loans.
Chart 1:
Composition of the central government's public debt
Sudden stop risk: stable investor base
16. Almost entire internal debt (i.e., more than 90 per cent) of the Central Government
(Chart 1) and all the market loans (which form more than 90 per cent of internal debt
[Chart 2]) have been raised from the domestic bond markets. An important feature of investor
profile of the G-Sec market is the dominance of domestic investors and limited foreign
investor participation. The ability of domestic markets to finance government operations is a
source of strength of the debt portfolio which is insulated from the currency risk. This is a
consciously adopted policy framework. Investment limits for the Foreign Portfolio Investors
(FPIs) have been enhanced in a phased manner to US$ 30 billion in G-Sec. The limits are
apportioned to different categories of investors with preference towards long term stable
investors and investments in longer maturities keeping in view the sensitivity of foreign
investors to global macro-economic factors and possible sudden reversals which could
potentially impact the systemic stability. Participation of foreign investor in the domestic bond
markets also needs to be examined in the light of our policy stance relating to calibrated
approach to capital account convertibility and the possibility of interest rate and exchange
rate volatility due to large scale reversal of capital flows.
Chart 2:
Share of market loans in internal debt
17. The domestic investor base is dominated by banks in short to medium tenor securities
and by insurance companies and provident funds at the long end. With the entry of
co-operative banks, regional rural banks, pension funds, mutual funds and non-banking
finance companies, the institutional investor base has been reasonably diversified (Chart 3).
There is very little retail participation in the G-Sec market as the G-Sec market has
traditionally been an institutional market.
Chart 3:
Investor profile of G-Sec market
For diversifying the investor base, especially in context of calibrated reduction in mandated
investments in form of Statutory Liquidity Ratio (SLR), there is need to focus on new
investors, such as, pension funds and retail investors. Reserve Bank has taken several steps
to promote retail participation, such as, enabling non-competitive bidding in primary auctions
to enable non-institutional investors to participate in auction, introduction of odd lot trading,
permitting trading of G-Sec on stock exchanges; mandating retail/ mid-segment targets for
primary dealers, web based trading access to gilt account holders, etc. The process of
developing the retail and mid-segment investor base will be continued.
Interest rate risk
18. DMS involves issuance of variety of instruments of varying maturities to cater to the
preferences of different investors. For example, some investors (banks and financial
institutions) like to invest in floating rate bonds (FRBs) for their duration management.
Similarly, institutional investors, such as, insurance companies, provident funds, pension
funds, etc. would prefer to buy long term bonds, zero coupon bonds and inflation indexed
bonds (IIBs) for their liability management. Floating rate instruments carry interest rate risks
on re-fixing. In India, although we have been raising funds by issuing variety of instruments,
such as, fixed rate conventional bonds, FRBs, Zero Coupon Bonds, CIBs, the contribution of
linkers (FRBs, IIBs, etc.) has remained small, thereby limiting interest rate risk in the debt
portfolio. There is, however, a need to increase the share of variable rate bonds to further
improve the breadth and width of the G-Sec market and enable market participants to
diversify their portfolio. Towards this end, IIBs have been issued linked to the Wholesale
Price Index (WPI). A new series is being planned which is linked to Consumer Price Index
(CPI).
Developing the G-Sec markets
19. Reserve Bank, as regulator of G-Sec market, has taken several steps to create a deep
and liquid market for facilitating price discovery, reducing the cost of government debt and
serve as a benchmark for other debt instruments. Reserve Bank through carefully and
cautiously sequenced measures within a clear cut agenda for primary and secondary market
design, development of institutions, enlargement of participants and products, dissemination
of market information, prudential guidelines on valuation, accounting and disclosure.
Consequently, the G-Sec market has witnessed significant transformation in various
dimensions, viz., market-based price discovery, widening of investor base, introduction of
new instruments, establishment of primary dealers and electronic trading & settlement
infrastructure.
20. For development of bond markets, Reserve Bank of India adopted a strategy for creation
of an efficient market infrastructure to enable safe trading. State of the art primary issuance
process with electronic bidding and straight through processing capabilities, an efficient,
completely dematerialized depository system within the Central Bank,
Delivery-versusPayment (DvP) mode of settlement, Real Time Gross Settlement (RTGS), electronic trading
platform (Negotiated Dealing Systems - Order Matching) (NDS-OM) and a separate Central
Counter Party (CCP) in the Clearing Corporation of India Ltd (CCIL) for guaranteed
settlement are among the steps that were taken by the Reserve Bank over the years towards
this end. The system makes G-Sec trading practically risk free and efficient.
21. The system of Primary Dealers (PDs) was established to provide support to the market
borrowing programs of the Government and also to impart liquidity in the secondary markets.
Subsequent to the withdrawal of the Reserve Bank of India from the primary market, as
mandated by Fiscal Responsibility and Budget Management Act 2003, the PD System has
been underwriting the entire Government of India market borrowing.
22. To meet the diverse funding and hedging needs of the participants, there is need for a
wide array of instruments and products which would also offer benefits of diversification in
the portfolio. Over the years, several instruments like zero-coupon bonds, capital-indexed
bonds, floating rate bonds, Separate Trading of Registered Interest and Principal of
Securities (STRIPs), bonds with call and put options, cash management bills, inflation
indexed bonds have been introduced after wide consultations with market participants. Plain
vanilla fixed coupon bonds, however, remain the mainstay of issuances.
23. Reserve Bank has always focused on improving liquidity in the debt markets. Reserve
Bank has constituted a Working Group (Chairman: Shri. R Gandhi) to examine ways to
improve liquidity in Government securities and interest rate derivatives market which made
several recommendations including suggestions for consolidation of debt. Many of the
Working Group recommendations are being implemented. The recommendations, such as,
truncating the time window for bidding in the primary auction; changing the settlement cycle
of primary auctions in Treasury Bills (T-Bills) from T+2 to T+1; conduct of primary auctions in
G-Sec as a mix of both uniform-price and multiple price formats; re-issuances of existing
securities in state development loans; and migration of secondary market reporting of OTC
trades in G-Sec (outright and repo) from PDO-NDS to NDS-OM and CROMS, respectively,
have been implemented. Work is in progress with regard to recommendations on
consolidation of public debt.
24. As a result of the DMS, all sustainability indicators, viz., level of debt, ratio of interest
payments to revenue receipts, average cost and few floating rate instruments point towards
long term sustainability. To take the process further and improve stability of debt portfolio,
Reserve Bank has been striving towards consolidation, both passive and active methods.
Passive consolidation is achieved through re-issuances and nearly 95per cent of the bond
issuance is through reissuance. We have also embarked on active consolidation through
switches and buy-backs, which is expected to reduce roll-over risks significantly.
25. It is against this backdrop, I would like to make some comments on an issue that is
engaging attention of policy makers for a decade and half: the issue of separation of debt
management from the central bank in India.
Institutional arrangements for sovereign debt management
26. To put the debate in its historical context, with regard to the location of sovereign debt
management functions multiplicity of arrangements exist around the world: in the ministry of
finance, central bank or autonomous debt management agency. Cross country experience
shows that there is no international best practice and the adoption of any particular model
could depend on country specific circumstances. In the nineties, several OECD countries
entrusted debt management to separate agencies with the objective of providing monetary
policy independence to central banks so that they could concentrate on inflation
management and not impacted by the conflicting objective of raising debt for the sovereign at
low cost. It was also perceived that independent Debt Management Office (DMOs) would
improve operations of debt management through improved accountability and specialisation.
Many developed nations have followed suit.
27. In India, the genesis of the proposal could be traced back to various Committees/Working
Groups, such as, Committee on Capital Account Convertibility (1997); Review Group of
Standing Committee on International Financial Standards & Codes (2004), Percy Mistry
Committee, Internal Working Group on Debt Management, MoF and finally Financial Sector
Legislative Reforms Committee, which suggested separation of debt management from
monetary management. During this phase the Reserve Bank, while suggesting separation,
has made it conditional on attainment of three milestones: development of the government
securities market, durable fiscal correction and an enabling legislative framework. It is argued
that separate DMO will help to establish transparency, and assign specific responsibility and
accountability on the debt manager and could lead to an integrated and more professional
management of all government liabilities, with a focused mandate.
28. The public discourse also focused on three kinds of conflict in sovereign debt
management being done by the central bank:
i. The objective of the Reserve Bank as a public debt manager may conflict with the
prevailing monetary policy stance and the market participants; the central bank may not
be increasing interest rates to keep borrowing costs low and thereby compromising on
inflation management;
ii. The central bank, being also a debt manager, could take government debt on its
balance sheet to ensure successful government borrowing; and
iii. The imperatives of the Government borrowing program may influence the decision of
the Reserve Bank, as regulator of banks, to reduce the SLR requirements.
29. In my view, the institutional arrangements for debt management must take into view the
country specific context and requirements. To set the context for this debate, we can
examine the conflict of interest argument in Indian context. Even as the government's
borrowings had gone up both in absolute and proportional terms, Reserve Bank has raised
policy rates several times during the past five years; clearly indicating its commitment to price
stability. Inspite of a six-fold increase in the size of the net market borrowing of the Central
and State Governments during the decade 2000-10, the average weighted cost of borrowing
declined by over 450 bps compared to the previous decade. In 2009-10, during the global
financial crisis, Reserve Bank carried out government borrowing of about '4 trillion without
disrupting the debt market or elbowing out private sector's credit requirement. Inspite of
rising interest rate scenario, the Reserve Bank was able to complete the Government's
borrowing program in a non-disruptive fashion at a reasonable cost.
30. The FRBM Act, 2003 which precluded the Reserve Bank from participating in the primary
auction of the Government bonds has resolved the conflict of interest with the monetary
policy. Monetary signalling in India is now done by the repo rate (policy rate) under the
liquidity adjustment facility (LAF) and not the bond yields.
31. As regards the SLR issue, it needs to be appreciated that the SLR has been used by the
Reserve Bank as an instrument of prudential regulation. This has ensured that at any given
point of time, all the banks have a specific percentage of their liabilities in the form of
riskfree, liquid instruments. In fact, such requirement for banks to hold a certain percentage of
their assets in cash and cash like instruments is one of the key corrective instruments being
discussed internationally, and formed integral part of liquidity risk management under
Basel III capital framework. In any case, pre-emptive mandated investments are being scaled
down as can be seen from SLR reduction from peak levels of 38.5 per cent of NDTL of
banking system to the present level of 22 per cent.
32. While theoretical formulations can conjecture conflicts of interest; the validity of
assumptions need to be tested by evaluation of experience/performance and on that count,
conflict of interest cannot be established with regard to Reserve Bank.
33. Another point that merits attention is that the proponents of separation, while citing
examples from countries which differ significantly with regard to institutional milieu from India,
pay little attention to nuances of debt management operations. For instance, domestic debt
in the UK is managed by DMO, whereas external debt is the responsibility of the Bank of
England. The whole concept of an "all-in-one debt office" is a theoretical construct than a real
organisation.
34. It is also important to note that sovereign debt management (SDM) is much more than a
mere resource raising exercise especially in a developing country context like ours. The size
and dynamics of government market borrowing has a much wider influence on interest rate
movements, systemic liquidity. An autonomous DMO, driven by specific objectives
exclusively focusing on debt management alone, may not be able to manage this complex
task involving various trade-offs.
35. With regard to autonomous DMOs focusing on specific responsibilities, the experience of
European debt managers is instructive. The experience of DMO in the Euro area (especially
Greece, Portugal and Ireland) has been less than satisfactory. The independent DMOs
seemed to have been guided by perverse incentives and issued short-term/foreign debt in a
disproportionate fashion, intensifying roll-over risk, sovereign risk and financial instability.
The debt management strategy and operations have resulted in a skewed maturity profile
with balloon payments. For instance, Greece has bunched maturities during 2010-19 with
interest payments on public debt constituting nearly 40 per cent of Greece's budget deficit
during 2009. Large proportion (above 70 per cent) of debt of Portugal, Greece and Ireland
was held by non-residents. As foreign investors turned risk averse and started withdrawing
investments, rating agencies downgraded the debt of these countries. The debt management
strategy has jeopardized the fiscal situation and financial stability. Therefore, autonomous
DMO focusing on specific objectives, such as, cost minimisation in isolation and not in
conjunction with other macro-economic policies may result in sub-optimal debt management
outcomes.
36. Persistent fiscal deficit warranting huge borrowings, often at the cost of flow of reserves
to the private sector, has been the predominant feature of the Indian economy. Increasing
borrowings by the Government, both the Central and the State Governments, have to be
strategically planned and tactically executed keeping in view the market conditions, liquidity
situation and macro-economic implications. Thus, given the persistently large size of the
market borrowings, there is a strong case for confluence of interest between monetary policy
and debt management in India. On the other hand, Government's ownership of majority
stake in public sector banks (which own 70 per cent of banking sector assets) could be a
source of conflict of interest with its role as debt manager, either directly or through an
agency controlled by it.
37. In a situation of excess capital flows requiring forex intervention from the Reserve Bank
and the consequent sterilisation through issuance of Government securities under the Market
Stabilisation Scheme (MSS), the coordination of SDM with these operations needs to
continue. In 2007-08, the volume of MSS issuance was comparable to that of the SDM
issuance. With the reversal of capital flows in 2008-09 and the large increase in
Government's market borrowing program, there was significant unwinding of the MSS and
the Reserve Bank could manage the situation non-disruptively as both the functions were
entrusted to it and it could undertake the necessary liquidity management measures
seamlessly. During second half of 2013, the Reserve Bank of India used cash management
bills (CMBs) as a measure to contain the volatility in the foreign exchange market.
Separation of SDM from the Reserve Bank will make it very difficult to harmonise these
operations as is done at present.
Post-crisis lessons
38. In the pre-crisis phase, the functions of monetary policy, financial stability and SDM used
to be looked upon as an "impossible trinity". Post-crisis, their interdependence is increasingly
being recognised. Unlike in the past, central banks' operations are not currently confined to
the shorter end but are carried out across the yield curve. Similarly, Government debt
managers, opportunistically or under compulsion, are increasingly operating at the shorter
end. This has intensified the interaction between monetary policy and SDM, warranting
greater coordination in the interest of policy credibility and financial stability. Internationally,
there has been a rethinking on the issue of debt management by Central Banks, with
scholars like Charles Goodhart articulating that debt management being a critical element in
the overall conduct of macroeconomic policy, central banks should be encouraged to revert
to their role of managing the national debt.
39. In this context, the cause of coordination is always better served under the same roof
than by a separation from central bank, accompanied by a closer inter-institutional
coordination. There could be an argument that coordination mechanism could be designed
between the central bank and the DMO, either by statute or executive order. The experience
of coordination mechanisms between DMO and central bank, which are vital for economic
management, is however, far from satisfactory and impacted debt management. There has
been instances of failed auctions, e.g., in the UK (March 2009), causing reputation risk for
both the authorities. In the above backdrop, it is strongly felt that given the large size of the
market borrowings, there is a confluence of interest between monetary policy and debt
management in India.
40. The significant impact of the Government borrowing on the broader interest rate structure
in the economy and, therefore, on the monetary transmission process in financial markets,
makes it a critical component of the macroeconomic management framework. In such a
scenario, central bank involvement in managing the market volatility and market expectations
arising out of government debt borrowing becomes necessary. The past experience,
reinforced by the recent developments