RBI Annual Report | Central bank to draft pilot debt management strategy for some states

The Reserve Bank of India (RBI), for the first time, has proposed to draft a debt management strategy for few states with respect to finances and risk management, the central bank said in its annual report released on May 27.

Indian states borrowed Rs 7.02 lakh crore from the debt market in FY22. This was 38.4 percent of the overall debt borrowing of Rs 18.3 lakh crore for FY22. For FY23, the government has pegged its market borrowing at a record Rs 14.31 lakh crore for FY23, while states are scheduled to borrow Rs 1.903 lakh crore from the debt market in April-June.

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“Around one-third of general government debt pertains to sub-national governments,” the RBI said. “However, a document outlining the strategy of debt management for efficient and effective management at sub-national government is lacking.”

The RBI also aims to conduct capacity building programmes for sensitising the state governments about prudent practices in cash and debt management, it said.

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Already, some states have begun to identify the rising debt on their balance sheet. Tamil Nadu, for instance, released a white paper on the state's finances. The paper revealed that the fiscal situation of the state is in “dire circumstances” mainly because the COVID-19 pandemic had stretched finances. The paper also highlighted how Tamil Nadu’s economy was vulnerable at the current stage.

The last two years have indeed seen the finances of state governments take a heavy beating, with outstanding liabilities of all states and Union Territories (UTs) rising to 31.1 percent of their gross state domestic product at the end of FY21 from 26.3 percent a year ago.

In the annual report, the central bank also said that it intends to review the debt management strategy of the central government.

Through this, the RBI wants to ensure that it mobilises market borrowings at low cost over medium to long-term, with prudent levels of risk and a stable debt structure. Simultaneously, it also aims to develop a liquid and well-functioning domestic debt market.

Record debt supply, reversal of easy money policies both in India and the United States, coupled with elevated oil prices have exerted pressure on bond yields, which move in the opposite direction to prices. The RBI is walking a tightrope when it comes to debt market management as it drains surplus liquidity from the system in an effort to tame inflation.

The central bank will ensure a smooth completion of the government borrowing programme in line with the guiding principles of debt management, according to the annual report.

It also aims to ensure a stable debt structure and proactively take appropriate policy actions, if necessary, the RBI said.