InvestorQ : What is the meaning of RBI monetizing the deficit and does it plan to do the same this fiscal year?
Chandralekha Desai made post

What is the meaning of RBI monetizing the deficit and does it plan to do the same this fiscal year?

Answer
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Mitali Bhutta answered.
5 months ago


Monetizing the deficit is when the RBI resorts to printing notes to make up for the shortfall in the budget. This year with revenues likely to weaken and high levels of expenditure needed, the RBI has hinted that it could be monetizing the government deficit by directly buying the bonds. In fact, there could be first signs of monetizing deficits as the RBI has already started directly buying bonds issued by the government in the secondary markets. The gap in the budget is likely to be to the tune of Rs.10 trillion this fiscal year. COVID-19 has created a major problem due to falling revenues and rising expenditure commitments of the government. In the second week of April, the RBI monetized government deficit to the tune of Rs.14,000 crore. The RBI has already committed that it would keep liquidity abundant. RBI is yet to subscribe to primary bond issues, something it used to regularly do in the past, before Dr. C Rangarajan abolished that in 1997. It remains to be seen how much of the budget shortfall the RBI will end up monetizing. Too much of monetization can be inflationary.