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Thursday, July 23, 2009

Debt issuance this year, and setting up an independent debt management office

Writing in Financial Express, Mahesh Vyas and Jayanth Varma analyse the extent to which the 6.8% fiscal deficit of this year is `hard' to fund through bond issuance.

In FE today, Jayanth Varma has an article on the merits of setting up an independent debt management office, and they have an editorial on this subject.


  1. Many Indian companies just entered the global market to issue both debt and equity during the recent upturn in markets. They were able to make quick decisions about their funding based on advice from professional debt managers, namely investment banks. Contrast that with the approach of the government, which has announced a record level of borrowing this fiscal year. The government will move slowly, send confusing signals, and likely raise its funds in a cumbersome manner. Moreover, its 'investment banker', the RBI, will be worried about meeting so many other goals that it cannot possibly do an optimal job in raising money for its captive client. The need to separate debt management from monetary policy is quite clear, self-interested protests from the RBI notwithstanding.

  2. The issue has a parallel in the theory and practice of FRBM. Ideologically, the separation is fine. But in Indian situation, there are 'takes' and balances which the govt. borrowings involve, a complete sanitisation may raise issues in the beginning. The State Govts have been given independence to raise loans long back. Why many of them still bank on RBI ? As for its 'captive' client, RBI may have 'captive' lenders too. Timing of the switch-over may be more relevant.

  3. Dear Ajay

    I glanced over Mahesh's article.And i thought that the "math" behind it was flawed.Assuming his deposit growth number of 7.7 lac crore in 2009-2010, the final deposit number as on March 31 2010 would be close to 46 lac crore.Now if the banks would have to maintain 24% SLR ,the total investments would be close to 11 lac crore.I think the outstanding Investment in SLR (as per last WSS net of LAF) is 11.77 lac crore.So the banks can continue to NOT BUY GOI sec throughout the year and yet be comfortable on SLR!!.So my arguement for rate rise is thus: a) Banks can bide their time and buy and that isn't a comforting signal b)goi auctions are held every friday and traders look to unwind position quickly to participate in the next auction!! surely if everyone wants to be the first seller thats also not a comforting signal!!

    i would be happy if you share some thoughts.

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