Public debt disbursals and Public debt receipts are borrowings and repayments during the year, respectively, by the government. The difference between disbursals and receipts is the net deposit to the public debt. Public debt can be divided into internal and external debt. Internal debt carries, ways and means advance, securities against small savings, market stabilisation schemes, and treasury bills. The Union Finance Ministry has aim to establish Public Debt Management Agency (PDMA) with the objective of developing bond markets in the nation. PDMA will rationalize government borrowings and better cash management for developing bond markets.
The sources of these conflicts of interests in RBI managing the Government debt, as mentioned in the 2008 report of the Government are as under:
- There is a critical debate of interest between setting the short term interest rate (i.e. the task of monetary policy) and selling bonds for the government. If the Central Bank strives to be an effective debt manager, it would incline towards selling bonds at high cost, i.e. falling interest rates down. This leads to an inflationary bias in monetary policy.
- Where the Central Bank also controls banks, as in India, there is a further clash of interest. If the Central Bank strives to do a good job of settling its responsibility of selling bonds, it has an incentive to mandate that banks carry a large amount of government paper. This bias leads to unsound banking regulation and supervision, so as to make banks to buy government bonds, especially long-dated government bonds. Having a pool of captive buyers weakens the growth of a deep, liquid market in government securities, with exciting trading and speculative price discovery. This, results in, impedes the development of the corporate bond markets - the absence of a benchmark sovereign profit curve makes it harder to price corporate bonds.
- If the Central Bank governs the operating systems for the government securities markets, as the RBI presently does, this creates another clash, where the administrator / owner of these systems is also a contributor in the market.
Last Finance Minister Pranab Mukherjee was first announced the establishment of PDMA in Budget 2011-12. Though RBI was first to pinpoint the need for PDMA in its Annual Report 2000-01 and it was also bolstered by the Financial Sector Legislative Reforms Commission (2013).