RBI research examines debt management conflict of interest

Working paper discusses whether the Reserve Bank of India’s dual monetary policy and debt management roles affect price stability mandate; finds little evidence of impact

A working paper published by the Reserve Bank of India today (July 26) assesses whether the central bank's pursuit of both monetary and debt management objectives is damaging to the bank's price stability mandate.

The authors, Sunil Kumar and Rajendra Kumar, use monthly economic data from 2004–11 and quarterly data from first-quarter 2000 to fourth-quarter 2011 to produce a regression of inflation, the output gap and government borrowing on the central bank policy rate. The paper finds that the response of the policy rate to government borrowing is not statistically significant.

The authors note that separation of objectives may however be justified for other policy reasons. "We feel that the separation of sovereign debt management from the Reserve Bank to a public debt management agency, for which the process is already under way, could be justified by other policy imperatives, but not by the usual conflict of interest argument," the authors say.

Click here to read the paper.

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