RBI acts as the Public Debt manager

How exactly RBI acts  as the Public Debt manager of Government and whether there's a conflict of interest in doing so? Please explain the merits and demerits of having a separate body doing the same for the government.

Hmm. Good question. Probably fit for masters in finance and monetary policy!

why does debt occur?or in other way, why do we borrow?

Shortage or deficit

right. Why does that occur?why would one spend more than what they earn?

hmm. We borrow when we are sure, that we can put the money to better use, and from the outcomes of it, we can both attain our goal and pay the money back.

Example: The vegetable vendor borrowing to buy the vegetables, sell them, and thus able to pay off the debt and still retain some profit.

@But sir he should have an estimate in mind how much would be prudent to borrow

good, now, how much a vegetable vendor can borrow?

of course, if you are the lender, how much u will lend to a vegetable vendor?

Depending on how much he is going to earn from selling his vegetables sir,Based on his image in market, past records of paying back.

Right! You will take the decision bases on so many issues!if you don't do that; then the whole scheme of 'management of debt' collapses!!

If you lend more money, then the vegetable vendor may not know how to use it! The farmer may increase the cost at which he sells the vegetable seeing more money in the hand of vegetable vendor!!!And most importantly, the vegetable vendor may not be able to pay you back!!!

So, this 'paying back' is very imp and crucial to the 'debt mgmt system'.

ok, now, we all know from where govt borrows!

whom do they borrow from?

the govt borrows from the public!Yes. But, by what agency it borrows?

It does Through RBI.

Why?for three reasons

1. Its easy to borrow from RBI! Single agency! I would love to borrow 1 lakh from amar, than borrow 1000 rupees from each of you! Right?! 😉

2. When govt borrows, will it make any change in the market? yes, what will happen??

There will be less money in the market!!

And who controls the amount of money in the market?

RBI.

So, if i have to borrow thru someone, and if i am the govt and bothered about the liquidity in the country, then whom will i borrow from?

From the same person, who has control on the liquidity, so that, by borrowing does not have any effect?

Yes, RBI!

Now you know why all these years RBI was doing it!

Is there a conflict of interest? Yes, there will be problem for the govt, as RBI, which controls the money supply, will caution the govt and say that, it can't now lend money to govt!

Because, the govt expects the RBI to do both! And if the govt forces RBI, RBI will be forced to lower the CRR or SLR to allow more money in the market! Thus, the LENDING to the govt affects the other imp functions of the RBI!

@Sir apart from asking from RBI, Govt also gets money from PPFs, Small Saving funds etc. Does RBI also supervises these funds, These comes under 'Other Liabilities' in Debts of Govt.

Yes.

Advantage-Govt can borrow from single point, and it need not have the irritation of RBI advising it on borrowing!

Dis-It may lead to reckless borrowing!

Thats why fiscal consolidation was a precondition to setting up of PDMA.

Yes, even RBI can issue caution! But, having a buffer of PMDA will make it easy for govt to borrow now!!

@sir RBI did issue a caution,Recent developments make it binding on Govt that its securities WON'T be bought by RBI time and again apart from WMA

Yes,Now, suppose you are RBI.And i am govt and need to borrow from you!you keep on advising me every time i come to you!!So, what option i have?

i create PDMA and make you to listen to PDMA, and ask PDMA to give me money!!

ask PSUs and public sector banks to borrow my Securities and lend me money

yes, PDMA will do that for me, and give it to me as single point!! I'll get what I want.

@so the conflict of interest theory doesn't hold much ground?

Conflict of interest is there, as long as RBI does it! because, RBI may even refuse in order to keep its monetary policy intact!!

The monetary policy of RBI board may not be same as the PMO!!!

now, the PMO or cabinet has ensured that they are NOT restricted by the advice or thought process of RBI!by creating PDMA!

@what I meant was- that the conflict of interest for RBI (using the same Securities to issue money to govt + same securities to control liquidity) is a necessary evil?

Yes, amar, it is a necessary evil, if you want to have tight control on the economy!!

If you want to get adventurous, or audacious or willing to take more risk, then the conflict of interest is just an EVIL!

@can you please address few more negative fallouts of having PDMA?

Amar, negative impact of PDMA must be all over the net!!!and don't write all.

UPSC doesn't like aspirants with negative thinking, though they do appreciate balanced criticism, that ends with a positive note!

@Sir can the borrowing by Govt from RBI be seen just from angle of meeting deficits? Because the Credit ratings,Currency exchange rates and other factors of macroeconomics also come into play. So RBI and Govt has to be in tandem to agree on a way forward

Pradeep, what you say is very right! But, its possible that a popularly elected govt and a regulatory agency may not agree on all issues! remember, RBI stays permanent, and elected govts come and go!!!