Sovereign Debt Management in India: Interaction with Monetary Policy

6 Pages Posted: 13 Apr 2013

See all articles by R. Gandhi

R. Gandhi

Government of India - Reserve Bank of India

Date Written: October 1, 2012


India’s expansionary fiscal policy during the recent crisis resulted in higher government borrowing through 2008-09 and 2009-10. This borrowing requirement came in about 83% above the budget estimate in 2008-09, and 65% above the previous year in 2009-10. The debt-to-GDP ratio rose from 69% before the recent global financial crisis to 73% in 2010, creating a severe challenge for the Reserve Bank of India (RBI) in meeting the public borrowing requirement without causing market disruption. To hold borrowing costs down while scheduling issue maturities so that rollover risk was kept to a minimum, the RBI followed a multi-pronged strategy. The potential for interaction between public debt management and monetary policy has undoubtedly increased during the recent global crisis. This is due to the increase in short-term debt, which can jeopardise both the signalling of monetary policy and its transmission. India’s particular dilemma, however, was related to systemic liquidity, ie the system would preferably be in deficit for monetary policy transmission whereas a system in surplus would be more favourable for debt management. The RBI has resolved this dilemma by putting in place a monetary policy operating framework whereby the system is ideally allowed to be in deficit (or surplus) to the extent of the frictional component, i.e. 1% (/-) of the banking system’s net demand and time liabilities (NDTL). In this setup, the structural liquidity deficit (or surplus) is met through OMOs and adjustments in the cash reserves. Against the background of the increased interaction between sovereign debt management (SDM) and monetary policy, two important issues urgently need to be addressed. These are: (i) to ensure seamless coordination between SDM and monetary policy, especially during turbulent periods; and (ii) to revisit the role of central banks in public debt management.

Full publication: Fiscal Policy, Public Debt and Monetary Policy in Emerging Market Economies

Keywords: National debt, debt management

JEL Classification: E61, E63, H63, H74

Suggested Citation

Gandhi, R., Sovereign Debt Management in India: Interaction with Monetary Policy (October 1, 2012). BIS Paper No. 67m, Available at SSRN:

R. Gandhi (Contact Author)

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Thiruvananthapuram, Kerala 695033

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