Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / RBI’s OMO is monetization of debt, say economists
BackBack

RBI’s OMO is monetization of debt, say economists

RBI’s OMO is monetization of debt, say economists

Premium

New Delhi: The finance ministry has said the RBI’s open market operations (OMO), through which it releases liquidity to the market against government securities, are not monetizeation of public debt, but many economists do not subscribe to this view.

The government has pegged its market borrowings at over Rs4.5 lakh crore for this fiscal to fund widening fiscal deficit, pegged at 6.8% of gross domestic product (GDP). Since there are apprehensions that it would jack up interest rates and leave little resources for private sector, the RBI may resort to open market operations to inject liquidity in the system.

The finance ministry said open market operations should not be confused with monetization of public debt, which means that the RBI would directly subscribe to government bonds.

“It seems that the Open Market Operations of the RBI are being confused with monetisation. The government clarifies that OMO of RBI is a regular tool for effective liquidity management... The RBI can either buy or sell government securities in the secondary market as part of its OMO," the ministry said in a statement earlier.

Pointing out that OMO’s are not monetization of public debt, chief economoic adviser Arvind Virmani said in the US also the Federal Reserve has resorted to buying govt securities to deal with the crisis.

The FRBM Act empowers the government to go for monetization of debt under some circumstances.

“There is of course a provision in the said Act (FRBM) that on grounds of national security or national calamity or such other exceptional circumstances as the Centre may specify, the RBI could subscribe after 1.4.2006 to primary issues of the central government securities and further such grounds shall be placed by the government before both houses of Parliament," the finance ministry statement had said.

However, the Centre does not propose to invoke the above provision of the FRBM Act for facilitating RBI participation in the primary market for government securities, the statement had added.

Virmani said in the past India used to have the Centre’s deficit, then used to be called Budget’s deficit, which used to be finance by the RBI. “This is no longer a case."

However, many economists do not agree.

“It (OMO) is in a way monetisation of debt. The RBI is buying securities and putting cash in the system. It has all the effect of monetisation," rating agency Crisil principal economist D K Joshi said.

“They (federal reserve) done it to increase the money supply. Is that monetisation of federal debt?" he asked.

Expressing the same view, former chief economic advisor Shankar Acharya said it is monetization of debt.

“Yes, it is," he said when asked if the RBI’s open market operations is monetization of debt.

An economist from a leading bank, requesting anonymity said, OMO is not monetization of debt. However, in a way it is monetization because they are putting money into the system.

Amid ballooning fiscal deficit, the government had categorically said it has “no intention" to monetize its debt, which implies that it will not directly borrow from the RBI.

“(The) Government has no intentions of monetising its debt," finance minister Pranab Mukherjee told Lok Sabha in his reply to the debate on Union Budget.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 27 Jul 2009, 12:05 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App