In India, traditionally, a large component of domestic government debt was incurred at low rates of interest, which was statutorily prescribed for subscription by the institutional investors. A substantial amount of domestic debt was also monetised. The fiscal domination of monetary policy left very little manoeuvrability for RBI to pursue a monetary policy conducive to the overall objective of development of financial markets, price stability and economic growth.

In most of the developed economies, borrowing by the government from the central bank is prohibited. Also, to help the central bank to focus on the objective of stabilising the price level, debt management function has been separated from monetary authority. In India too, the issue was debated in late 1990's and it was concluded that such separation would require well-developed financial markets to finance government fiscal deficit. Then, India still had an administered interest rate regime. In the last decade, due to financial sector reforms undertaken since 1991, markets have developed rapidly and last remnants of administered interest rates on small savings are now being dismantled. Also, the Fiscal Responsibility and Budget Management Act of 2003 included a clause restricting the Government from directly borrowing from the RBI from 1 April 2006 except through Ways and Means Advances (WMAs) to meet temporary mismatches in receipts and payments or under exceptional circumstances. Therefore, it is considered that the separation of debt from monetary management can be undertaken now in India.

The separation has many advantages. First, separation would help the financial markets to integrate further. It is essential that the government mobilise its financial resources entirely from the market to help evolve a market yield curve. The interest rate structure that would consequently emerge would reflect market expectations and would be conducive to financial market integration. The development of a focused and transparent debt management strategy could also ensure that funds are available to the government at competitive rates of interest that will lead to expenditure prioritisation and to fiscal discipline in budget making. Prudence in fiscal and debt management that prevents any dominance on the monetary policy will encourage higher investment and economic growth.

Historically, the debt crises of 1982 and the Asian Crisis of 1997 had led many countries to assign priority to public debt management and then, a number of countries chose to separate debt from monetary management.