InvestorQ : Why is the RBI taking so long to monetize the deficit? Is it not a fairly simple process?
Dawn Cherian made post

Why is the RBI taking so long to monetize the deficit? Is it not a fairly simple process?

Answer
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Anu Biswas answered.
5 months ago


Actually, it is not as simple as that. It must be remembered that deficit financing was an accepted norm till 1997 when the RBI would automatically subscribe to any unsubscribed portion of the government bond issues leading to an indirect monetization of deficit. That was almost akin to printing fresh notes. With government borrowings up by 55% in this fiscal year, disinvestments looking difficult and income tax and GST revenues likely to lag, the government is going to have a problem of unmanageable fiscal deficit in double figures. Even after all the additional revenue sources identified there is still likely to be a gap to be filled. Then, what is stopping the RBI from monetizing the deficit. There are couple of problems. Firstly, higher money supply will lead to higher inflation once the recovery begins. That would mean bond yields in the market would go up forcing higher cost of funds on Indian companies. Secondly, the higher fiscal deficit could lead to a run on the rupee as foreign investors are likely to be wary of a country that runs the risk of a potential sovereign downgrade. Even $500 billion in forex reserves, India could face a challenge. That is what is perhaps keeping the RBI wary of monetizing the deficit.