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RBI unlikely to push deficit monetisation


Date: 23-09-2020
Subject: RBI unlikely to push deficit monetisation
NEW DELHI: The Reserve Bank of India (RBI) may not be keen on pursuing suggestions for monetisation of deficit, a proposal that is being pushed by a section of policy makers in Delhi as a way to reduce market borrowings during the second half of the current financial year.

Monetisation of deficit refers to purchase of government bonds by the RBI to help finance the Centre’s spending needs, something that is explicitly provided for in the Fiscal Responsibility and Budget Management Act (FRBM). 

Although the finance ministry has not formally taken up the issue, sources said, with the central bank, which also acts as the government’s debt manager, several experts have indicated that the decision should be left to the RBI to decide on the best course of action. 

RBI governor Shaktikanta Das  has repeatedly said the central bank is ready to use conventional and unconventional policy tools to deal with the current situation, induced by the Covid-19 pandemic.

The Centre is facing a massive shortfall in tax revenue due to the coronavirus  pandemic and is also staring at a large spending requirement to combat the disease and to step up expenditure due to the border standoff in Ladakh. With interest, salary and pension payments eating up a large chunk of the expenditure, the Centre has limited headroom to pare spending. As a result, the government was forced to step up borrowing during the first half of the current financial year and will now decide on the second half requirement, including the option to monetise deficit, in consultation with RBI. 

Some fiscal experts and central bank officials view current market as conducive for higher borrowings, given that there is little demand from private sector, which has been forced to cut output and put expansion on hold. In any case, economic activity is expected to pick up gradually. Add to it the low bond yields, which makes borrowing an attractive proposition. 

Source:-timesofindia.indiatimes.com

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