Saturday, July 13, 2024

RBI would possibly not drive monetization of the deficit

A plan which has been pushed by a segment of Delhi policy makers to reduce market borrowing for the second half of the fiscal year, may not be a concern of the Reserve Bank of India ( RBI).

The deficit monetization refers, as specifically given by the Fiscal Responsibility and Budget Management (FRBM), to the purchase of government debts by RBI to help fund the Centre ‘s spending needs.

Although the Ministry of Finance did not take the matter formally, sources said that many experts have suggested that with the central bank, which also serves as the Government’s Debt Manager, the decision to determine the best course of action should be left with the RBI.

The central bank is ready to use traditional and unconventional policy instruments to resolve the current pandemic triggering Covid 19, Governor Shaktikanta Das has repeatedly stated.

The centre faces a big tax deficit due to a coronavirus pandemic and faces a substantial demand for the war against the disease and increased expenditures because of the border impasse in Ladakh. The Center has little headroom to pare costs with interest, wage and pension payments making up a substantial portion of the expenses. Consequently, during the first half of the present financial year, the Government has been forced to improve its loans and will now, in consultation with RBI, decide on its second semester requirement and its monetary deficit option.

Some fiscal and central bank experts consider the current market conducive to higher borrowing, as the private sector has been constrained to reduce production and grow. Economic activity is expected to steadily recover in any event. Furthermore, the lower bond income makes borrowing an enticing bid.

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