In this column, Niranjan Rajadhyaksha explains key actions that Reserve Bank of India can take for monetising India's deficit in the challenging time of COvid-19 outbreak. He also highlights the need to plan the exit strategy once the economy stabilises.
"The printing press may have to start whirring again. Bond markets continue to be spooked by the extra borrowing that the government has to undertake to support the economy in these tough times. That is why market interest rates have been remarkably sticky despite the recent reduction in policy interest rates. Banks have been happy to park excess funds with the Indian central bank rather than buy government bonds. The Reserve Bank of India (RBI) will have to step in to support fiscal expansion in these times. It needs to buy government bonds by creating new money.
There is a growing consensus on this front. However, three specific questions need to be answered. First, how should RBI monetize government deficits in these difficult times? Second, how much monetization is possible right now? And third, what should the exit strategy look like once the economy stabilizes?"
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